Smart takes on rising interest rates from smart people
For today’s post, I thought I’d highlight what some smart people have been saying about rising interest rates over the last couple of weeks.
From Tom Bradley, President, Steadyhand Investment Funds:
“Rising interest rates are a healthy sign because previously rates had been unsustainably low.” “The fact that stocks, bonds and gold all went down tells me that some speculators are getting shaken out, which is a good thing for long-term, valuation-driven investors. Capital markets are in need of a better balance. The sooner they get there and complacency abates, the better off investors will be. If it means some short-term bumps along the way, it’s worth it.”
From Derek Foster, Author, The Idiot Millionaire:
“First off, I have no clue what is going to happen as I am not an economist and won’t pretend to be one here – but if interest rates continue to rise, this will hurt stock prices in the short-term.”
“History is littered with investors who have tried to dance in and out of the stock market – and most have failed miserably (myself included)! But who cares as long as the dividends keep coming.” “The dividends keep growing and many companies are buying back a lot of shares. As the markets have fallen because of the prospects of increasing interest rates, the Loonie has also fallen, making US stock dividends increase in Canadian dollar terms because they are more valuable when converted back to Canadian dollars.” “So what’s not to like? As stocks get cheaper, the companies can keep buying back their shares at cheaper prices, opportunities might arise for investors to find some cheap stocks to invest it, and US dividend income increases in Canadian dollar terms offering a “pay raise” to some investors.”
From Dividend Growth Investor:
“Stocks have finally began sliding down, and I am starting to get excited. I would love for stocks to get down even further from here. As someone in the accumulation stage of the dividend machine building process, I welcome any price weaknesses with open arms…the amateurs are starting to get nervous however. They need positive reassurance through rising prices. If they don’t get rising prices, they get scared, and start selling everything.”
“At the end of the day, smart dividend investors view stocks as partial ownership shares of real businesses. They do their research in uncovering those businesses, and then try to buy existing owners out at bargain prices. They can then sit back, monitor their business interests, and collect dividends one check at a time. After all, if you owned an apartment building next to a college that is always occupied, you won’t give a damn if its quoted valued fell by 5% – 10%- 20% in one single day. As long as you can rent your building out, you should do just fine by ignoring “quoted values”.”
I found these takes interesting since by and large, they are all saying the same thing: don’t worry about the short-term volatility and stick to your plan. You and I should do just that.
What’s your plan or advice for rising interest rates?
It’s interesting to see that some of these opinions are almost somewhat conflicting. But I guess that’s all it is – guesses and opinions. There’s some plusses and negatives about both high and low interest rates.
@My Own Advisor
I’m the ultimate ultra-conservative. I will always have a reserve of GICs/cash with which to buy a survival annuity. The rest of it gets deployed in various money (losing?) strategies such as index funds, bond funds and individual stocks.
We’ve been very fortunate so far in life simply because of when we were born: we were saving when interest rates were sky high and bought our first home when rates were setting record lows. I wish everyone could be so lucky: it can make a huge difference financially.
As I approach 40, I don’t ever plan on owning GICs.
Just indexed products and dividend stocks all the way.
Yes, you were VERY fortunate to save when interest rates were high and buy a house when borrowing rates were dirt low. Ideal situations really.
Get out of those losing strategies 🙂
I can see where the fear of falling dividend-stock prices comes from, though, having lived through the times when interest rates on GICs were amazing.
If GICs are paying 5% (which was actually considered low not that long ago) than many conservative investors are not going to even consider buying, say, BCE to earn 5%. Why take stock market risk to get the same return as a GIC? (These investors don’t believe in capital gains much.)
So people who bought stocks only because GIC rates were abysmal are now wondering if they should take their profits out of the market before they lose them. If you bought, again say BCE only 2-3 years ago, you’re sitting on a gain of 15-20%. And so the dithering starts. Sell now to lock in a profit? Wait till rates rise “a bit” to keep those dividends coming until the rates are more comparable? What if the market drops then?
Some of these investors need to have their money available to cash fairly quickly without much warning to pay for long term care residences and such if their health changes rapidly. They often never planned to be in the market but were driven into it by the prolongued drastic decline in interest rates for safer investments.
There’s an argument to be made that these dividend “aristocrats” will drop significantly if GIC rates raise significantly and that those particular stock prices will NOT rebound for decades or more. I don’t say that I agree with that argument but I have heard it put forward.
So yes, it does depend which type of investor you are: the young newbie who is looking for low prices to get in, or the old longtimer who is afraid of waiting too long to get out before prices tumble.
I can see these same fears Bet, but I can also see the upside.
In my short history of focused investing, about 10 years, I’ve heard ‘this time is different’ at least more than once 🙂
Sure, the triggers are different “this time” but the outcomes are the same: the stock market comes back and fixed income is a parachute for stocks when they fall.
I can see old-timers avoiding dividend stocks years ago for the same reasons some people flock to them today.
Going-forward, I intend to stick to a very simple recipe: invest in dividend stocks when I can and feel the prices are right for me, and everything else, balance my indexed products a couple times of year. That’s it. No GICs, no freaking out about interest rates, or anything else. This recipe worked during the “Great Recession” and I expect it to work again for me in the future.
One thing is for certain: the stock market preys on investor fear.
What is your plan going forward for investing?
Thanks for your detailed comment.
Stick to the plan is always good advice! 🙂 Unless your plan is really bad.. 😛
Ha, yes, that’s true.
Personally, I don’t care. Interest rates will go up, then they will go down, and up again. In the end, if you buy stocks in quality companies, you will make money anyway.
If people sell good stocks because of “noise”, so be it. I will gladly buy them at a lower price.
Spoken like a true investor. Thanks for stopping by.
Great post Mark! I love these two lines from Derek “History is littered with investors who have tried to dance in and out of the stock market – and most have failed miserably (myself included)! But who cares as long as the dividends keep coming.”
I also wrote a post awhile back on rising interest rates “Should You Keep Investing When Interest Rates Rise?” The answer was yes!
Sticking to your plan is key.
Thanks for the comment Kanwal. Just read that post. 🙂
I love to hear y’all with your ‘stick to your guns’ strategy. The next crash will come when it hurts the most – i.e. when baby boomers on mass need to start liquidating houses and stocks in order to live.
You might be right Ian. It could be very messy in a few years if boomers haven’t planned for retirement.