Does the Fed Threaten Your Finances?
By Tom Wall
In 1981, the 10-Year Treasury peaked at a whopping 15.84% as the Fed fought to battle the high inflation of the 1970s. These rate increases were man-made, and not voted up by some independent market the way stocks are. As inflation rears its ugly head in a way not seen for 40 years, presumably due to the excessively easy (low rate) policies of their past, the Fed has done a complete 180 and indicated it will continue to raise rates until inflation is under control. They’ve done it before, and will do it again. “Don’t fight the Fed,” goes the familiar adage for investors.
Is this time different? Yes. Rates are coming off all-time lows, which wasn’t the case back then. This translates to disproportionately greater impacts to things like bond performance or your mortgage payment. Also, national debts and the amount of leverage households carry against their homes are MUCH higher than back then. The Fed must balance fighting inflation with causing a major economic depression. Inflation is a tax on the poor and middle class, so price stability is vital for society. On the other hand, if markets crash and values of assets decline sharply, businesses will suffer or fail.
As conservative investors fret about the sharp losses in their bonds this year, many are questioning their strategy. Bonds may still be a great form of diversification, but probably less so than in the past unless rates go much higher. And if they do, that path will be painful for bond investors.
What to do? Diversify more. I happen to know a vehicle that can’t go down in value and participates positively as interest rates rise, all while protecting your family and providing guarantees. It’s the best kept secret in financial planning, and a vehicle many investors don’t even know they wish they owned.
