My approach for higher interest rates
Some time ago, I wrote about my investing approach for a prolonged low interest rate environment. I wrote, while low interest rates are good for a few reasons (including great borrowing costs), prolonged interest rates have some big drawbacks: they hurt fixed income assets like bonds and savings accounts and consequently hurt folks that are fiscally conservative.
With bond yields on the rise and possibly much higher going-forward I thought it might be interesting to share my investment approach for a rising interest rate environment. After my three steps are done, I’d like to hear from you about your plans…
Since our total debt comprises a modest car payment but also a fat mortgage, the first thing I’ll focus on as interest rates move higher is our mortgage debt; that’s our highest interest debt around 3%. We’ll continue to pay down our mortgage using lump sum prepayment privileges, maybe even make a few more lump sum payments than before if we can. If we keep after this mortgage beast we’ll be debt-free in 8 years. Having no debt burden will not only feel amazing but will provide my wife and I with some significant financial flexibility.
I’ll avoid making any major investments in bonds. As interest rates climb, bond prices fall and while falling prices (to make investment purchases) are usually a good thing; we have enough bonds in our portfolio. Instead, I’ll take the higher bond yields as they come and just reinvest the distributions paid by our bond holdings to add to our existing position every month. (I recall we’re DRIPping two bond ETF units every month).
Every month, I try and set aside about 5% of our net income for investment purposes. Last year, money saved was invested into a few Canadian dividend paying stocks and namely U.S-listed Exchange Traded Funds (ETFs). I’ve read a few articles that stated equity markets will falter after rate-hikes are announced because investors will react irrationally to the new the monetary policy. If that happens, that works for me since I like to buy my equities at cheaper prices.
As you have just read, we don’t have much to adjust when interest rates rise. Actually, some pretty boring plans lay ahead: paying down our highest interest debt (mortgage), keeping our bond allocation relatively steady and investing in the stock market when some stocks dive lower in price. Makes me think I’ve missed something important to do because it seems too simple to work.
What are your plans for higher interest rates?