It is becoming
inevitable that both interest rates and rates of inflation will be on the rise
during the coming months. Why would this
matter?
To begin, most
investors not only care about how much money they have, but also about how
much they are worth. On a relative
basis, higher interest rates and greater inflation erode the imagery of one's
cash. The "fair value" of our
net worth is oftentimes equal to the net worth value minus any debt or outside disorderly
factors. When the destructive values are
increasing, the purchasing power of your money is diminishing.
The cost of milk,
tuition, travel, home-buying, etc., creates a cacophony of "noise"
that disrupts your ability to get and stay ahead.
The timing of the rate
hikes really couldn't be more ill-timed.
Just as the economic recovery is taking root (following the calamity of
the last Great Recession 2008) a daunting assessment is being thrust upon the
backs of the investment population.
Given enough time to digest the rate hikes, the financial markets have
thus far responded relatively benevolently. But consider that as stock companies will
eventually have to "pay more" to borrow money, it probably will eviscerate
their heretofore maximum profits; municipalities will have to dig a little
deeper to meet their debt obligations; and the average investor will have to
shell out more cash to buy a car, television, or college education.
Considering the time,
cost, and opportunity of pursuing higher returns with greater portfolio security,
there seldom is a single panacea to complex investment problems. The conundrum is that very long term cyclical
phenomena are too often employed to try and explain short-term performance
expectations. For example, as interest
rates start to rise the potential over time to buttress portfolio performance
with a finite baseline rate of return (that's the long-term part of the
equation) will be thwarted by the impact of "expensive money" upon
current portfolio valuations (the short-term, knee-jerk response). Consistently beating the fantasy averages is
a fleeting and elusive objective. The
goal, I believe, should be to evaluate
your unique situation, define your expectations for your money, and establish
the proper risk protocols to enable successful portfolio results during periods
in which circumstances might be in flux.
It is a more valuable
use of your time and energy to focus attention upon the processes of your investment
methodology rather than upon the outcome of the methodology, itself.
Patience
Throughout the many
gyrations of the financial markets' journeys, the challenge is not only to
quantify the integers which represent those changes, but also the impact of
those changes upon the human condition.
While we might be able to calculate the numerical level of inflation,
for example, how do we measure the financial "cost" of those data
upon people's lives?
Divesting oneself of
the performance expectations game is not easy to do. Portfolio results oscillate depending upon
the circumstances of the overall market and economy. Remaining calm in the face of imminent change
is an acquired skill set. We also know
that things are always perceived as most severe immediately upon inception,
while those factor's impact usually dissipates over time....good or bad.
Are you rich or
poor? It depends whether you use
empirical number-crunching to answer that query, or whether a values-based
judgment is a better way of prioritizing what's important.
