Weekend Reading – The upside to higher rates edition
Welcome to a new Weekend Reading post: the upside to higher rates edition.
Before this Weekend Reading theme, a reminder about some latest posts on my site and my brother-site Cashflows & Portfolios:
In case you missed it, here are some free, best-of, top retirement calculators to toy with. Thanks to Rob Carrick for a mention in The Globe and Mail on this one!
The stock market is down, a fair bit in 2022, but my dividend income is WAY up. How on earth is this possible?
The upside to higher rates
Headlining Weekend Reading is the upside to higher rates with thanks to an article in the Financial Post from Jason Heath.
From the article, things to be mindful of as rates move, slowly, higher:
- “Higher rates may cause a strain for highly indebted borrowers in the short run, but over time they may also help recalibrate housing budgets for borrowers based on real life monthly payments. This may also help stabilize the housing market, hopefully leading to a soft landing instead of a housing crash.”
This would be welcomed news for potential home ownership, for many Canadians.
- Another positive with higher rates – cash or GICs may not get burned. As you well know by now, as interest rates rise, bonds fall. A more compelling space to put your short-term savings needs is via cash savings or using GICs. Jason was correct to quote that “GIC rates have surpassed levels not seen since 2010. Some institutions are offering five-year rates of more than four per cent.”
- With interest rates so low, or what has been low, that has historically put a great deal of pressure on pension plans to fund future payment liabilities to their members. Not so as rates move higher. So, if you’re fortunate enough to have a workplace pension you should be cheering just a little bit as interest rates move higher to help you fund your retirement lifestyle.
- Finally, Jason also highlighted higher rates can be better for annuities – for the same reasons pension plans work in a modest-rate environment.
Further Reading: How annuities work and more below!
One thing Jason forgot to mention which is very important to me, is higher rates signal the beginning of the end for this upside-down-world we’ve been living in. What I mean by that is government spending occurs without end or consequences. Excessive consumer borrowing vs. saving is rewarded. Finally, investors can thrive more by being a bit more strategic: investing in banks/the financial sector, via the consumer discretionary sector, and it might provide opportunities to buy technology assets or growth-oriented companies at depreciated prices. I think we’re seeing that play out right now…
As investors, we generally want to get the best risk-adjusted returns for any money we’re putting at risk in the stock market. As interest rates rise, the future potential returns we can get on lower-risk assets like bonds becomes better, often making higher-risk investments like stocks less attractive – or attractive at buying prices for many. Keep that in mind as you see some market volatility in the coming months or even next year or so, as reasons to simply stay your investing course or pounce on more stocks where you can by buying more.
Related Reading: Learn to live with stocks.
More Weekend Reading…
A reminder for next week – these women can money! Check out WomenCanMoney.com – a virtual summit for women, by women. Learn from 15+ Canadian women money experts whom over 3 days (May 11-13, 2022) who will teach you strategies and action steps you can take to feel more confident and empowered with your money. Use my personal link here to enjoy the event!!
Speaking of women who can really money, kudos to Penny from ShePicksUpPennies for being mortgage-free – no borrowing debt or higher interest rates to worry about for her!
From Penny on her empowerment:
“I’m not sure 26 year-old me would recognize herself 10 years later. But 26-year-old me is certainly equal parts proud of and grateful for everything my younger self did to get us started on this path–even if I didn’t have a clue where the path would lead or the tempo I would eventually decide to take!”
I had to laugh at this when it comes to higher rates:
Thanks to Julien and the team at HardBacon for listing yours truly as one of the top money influencers in Canada to follow. A nice honour – and I’m really just trying to pay it forward to others where I can – so thank you and all readers as well.
You know I’m trying to grow my dividend income for semi-retirement. Well, so are others, and they’re doing a fine job:
Check out Rommel’s growing TFSA portfolio here.
Check out Dividend Daddy and what he owns. Just wow. From his site:
“This means that in April:
- I earned $171.64 every day from dividends ($5,149.28 / 30 days).
- I earned $30.65 per hour from dividends (assuming a 9-5pm job)
- I earned $7.15 every hour of every day of the month from dividends.”
Melissa hit another all-time high with her portfolio.
- “Total dividends received for April 2021 $4,596.42
- This is an increase of 37% YoY (April 2021 vs April 2022)
- 2022 total dividends received so far $12,844.83
- This means we’ve reached 36.70% of our $35,000 year-end goal.”
Impressive stuff. Learn what they own and how they invest folks…
The Dividend Guy highlighted 10 traits of a successful investor (dividend or not). I would agree with pretty much all of this.
Some of his comments remind me of this list I found some time ago online: The Laws of Wealth
Another reminder to avoid any “4% rule” safe withdrawal rate as gospel. Even the founder of that rule doesn’t follow it!
I dedicated an entire Weekend Reading edition recently suggesting you rethink using the 4% rule in any great detail.
Learn about market corrections (including what not to do) in Dale Robert’s Sunday Reads.
Have a great weekend!