Friday, May 25, 2018

Thrifty Thinking: Interest Rates and Investments

I had a chance to email Sally Brandon, Senior VP of Client Services and Advice at Rebalance IRA, about interest rates and investments. 
How do treasury notes work?
The U.S. Treasury issues debt to pay for government operations in three forms: Treasury bills, Treasury notes, and Treasury bonds. The important difference between them is their duration, how long they last. Bills last for one year or less, notes from 2 to 10 years and Treasury bonds for 30 years. Naturally, the interest paid on each of these different types of debt will vary, and exactly how the interest is paid differs slightly. For the individual investor, however, these differences are somewhat academic. The simplest way to invest in government debt is through an index fund that owns many different durations of government debt, be they bills, notes or 30-year bonds. Owning U.S. government debt through an index fund or an exchange-traded fund (ETF) allows the individual investor to diversify at a very low cost and keeps the investment process extremely simple and predictable.

What does the interest rate have to do with investment strategies?
The benchmark interest rate set by the Federal Reserve is the baseline for the cost of money across the entire economy. As the interest rate rises or falls, so too will the interest cost of every other financial product: credit card rates, auto loans and mortgages, as well as interest paid on bank savings accounts. As long as the interest rate is changing gradually and in a way that investors and businesses find predictable, the impact of the change should be negligible. The Federal Reserve raises or lowers the interest rate in an attempt to either encourage economic growth or, conversely, tamp down potential inflation. A prudently managed and diversified portfolio of stocks and bonds, as well as other investments, will see little change from a gradual increase or decrease in the interest rate. Rebalancing your portfolio periodically means that your investments are recalibrated to match the changing economic landscape. Ultimately, what matters is not the interest rate but owning the right balance of stocks and bonds for your personal investment goals over the long term.

How can people make sure their investments are performing well?
The whole purpose of investing is to protect the purchasing power of cash that you have saved to spend in the future. A well-constructed portfolio will invest that cash in a manner that captures returns that are in excess of inflation and which compounds your money, doubling its value in predictable time frames. It's easy to focus on one stock or another and get emotional about a big “win” while blithely ignoring concurrent losses that drag down your overall performance. That's why diversification is so important. Owning many stocks and many bonds allows you to focus instead on the big picture, which is overall return compared to inflation -- is your money growing and are you protected from losing purchasing power many years from now? Your financial advisor should be able to provide a very clear annualized number which shows that your investments are growing in excess of the inflation rate. That number should be shown to you after the effect of any fees charged for the advisor and fees for any investments he or she buys in your name. Increasingly, these numbers are expressed in dollars as your future income, a monthly retirement “paycheck” that will supplant your regular work income once you leave the workforce.

Ms. Brandon holds a B.A. from the University of California at Los Angeles and an M.B.A. from the University of Southern California. In addition to her many professional accomplishments, as a wife and mother, she brings an intuitive understanding of the personal side of retirement saving. Brandon began her retirement investment career at MarketRiders, where she supported many of the company’s retirement-investor clients, who collectively have more than 10,000 portfolios and $4 billion on the platform. She is a registered Investment Representative and holds a Series 65 securities license.

Rebalance IRA is a pro-consumer retirement investment firm that offers lower costs, endowment-quality globally-diversified investment portfolios, and systematic rebalancing. This investment approach is combined with a team of sophisticated and highly credentialed finance professionals who provide advice that is unbiased and focuses on the client’s long-term retirement investment goals. Rebalance IRA is headquartered in Palo Alto, Calif. and Bethesda, Md., and currently manages over $600 million in client assets.
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