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Fed rate rise: Three key questions investors must now address
Investors must ask themselves three crucial questions now, in the wake of the Fed’s interest rate hike.
The Federal Reserve increased interest rates for the second time in three months today, incited by strong jobs data and forecasts that inflation is, at last, moving towards its goal.
This increase by the world’s defacto central bank confirms that we are indeed in a new era of higher inflation and higher interest rates. As such, investors must now position themselves accordingly.
Of course, although rates are now starting to normalize, it could take a couple of years to get there, but when they do, the global economy will look very dissimilar to the present.
Therefore, in line with this shifting landscape, investors need to address three key questions.
First, is my investment portfolio properly diversified? Possessing a well-diversified portfolio is one of the essentials of successful investing. That said, many investors are not adequately diversified, for a variety of reasons. Consequently, they are at risk, and likely to miss out on inevitable opportunities.
Indeed, having a suitably diversified portfolio, across geographical regions, asset classes and sectors, and not trying to be too clever with sector or regional bets, is perhaps more vital than ever. The traditional relationship between sectors and regions has diminished somewhat since President Trump took office. As such, there will be a lot riding on which way the greenback heads, and which policies are rubber-stamped by Congress.
Second, am I prepared for dollar swings? Over the short term, an increase in Fed rates will entice capital from overseas into the U.S., particularly to the energy and finance sectors, that are more likely to benefit from President Trump’s policies. However, emerging markets will become less appealing as a strong dollar makes interest and repayment more expensive in local currency.
Nevertheless, the dollar’s strength may weaken in the upcoming months. Although, the markets are pricing in three hikes this year, I think there will be two, which would mean a fall in the greenback later in the year.
Finally, third, am I prepared for inflation? The U.S. economy may not have a grave issue with inflation now, but it can be said that inflation will almost certainly creep on us.
As such, it’s important for investors to keep some powder dry to be ready for this time, as their dollar-buying power will take a hit when it does arrive.
Consequently, investors who answer these three important questions honestly, and take action, will find lower returns are not just a matter of course in this new era of higher rates and inflation.