How to Capitalize on Historically Low Rates
Photo by Wes Battoclette
The Private Client Reserve of U.S. Bank provides investment, trust, banking and planning services for its clients across the country and has a local team in the Greater Cincinnati area. The Cincinnati Reserve investment team is co-managed by two men who also serve on the market’s leadership team: Brian S. Clark and John D. Posey, who have the title of Senior Vice President, Portfolio Management Managing Director of The Private Client Reserve of U.S. Bank.
Clark and Posey offer strategies for capitalizing on the market’s historically low rates and give readers a glimpse into what the future holds for investors.
LEAD Magazine: With rates likely to rise one or two more times this year, what should investors be focused on now?
Brian S. Clark: Brexit (the exit of Great Britain from the European Union) appears to have put global central bankers in a more cautious mood. We now believe a rate increase is unlikely until the December Fed. meeting. By this meeting, we will be past the U.S. presidential election, have additional clarity on the next step to Brexit, and U.S. labor markets and inflation data should improve. There are very slight odds for an increase at the September meeting, but we believe this would require key economic data to perform well above expectations. In 2017, barring a significant uptick in political uncertainty, we believe the Fed is likely to raise rates two or perhaps three more times.
LM: Where are the opportunities?
JOHN D. POSEY: We believe investors should maintain well-diversified portfolios including stocks, bonds, real estate, commodities and alternative investments to combat market volatility and to remain on track for long-term goals. Returns are likely to be modest, given low interest rates and fair to full equity valuations. However, we believe portfolio diversification across a mix of growth and income investments is preferable to help weather the long-term nature of this uncertainty, while continuing to earn some return over cash in the near term.
LM: How about consumers? What should they be doing now while rates are still historically low?
BSC: Lower rates offer consumers an opportunity to refinance debt at a lower interest rate. For example, as of last week, rates on a 30-year fixed mortgage were 3.625 percent – well below historical norms. Debt consolidation can be another way to take advantage of low interest rates. Combining all of your outstanding debt into one low interest rate loan is an effective way to streamline your budget and reduce monthly payments.
LM: Who are the people who can benefit the most from the current rate environment? Millennials? Homebuyers? Retirees? And why?
JDP: Homebuyers are the people who will most likely benefit from the current rate environment. With rates at historically low levels, homebuyers will be able to lock in longer-term mortgage rates and benefit from this lower rate environment as rates begin to increase either later this year or into 2017.
LM: What are some common mistakes people make in this sort of a rate environment?
BSC: I see two common mistakes in a low-rate environment: the first, investors will deviate too far from their asset allocation and risk-tolerance to “chase yield.” In an effort to achieve higher income, they will go further out on the fixed-income yield curve or move fixed-income assets into higher dividend- paying equities. The unintended consequence of this is the potential for increased risk profiles in the portfolio.
The second mistake is that consumers are more likely to acquire more debt at lower rates. The risk is acquiring too much debt. How can people avoid those traps? Work with a team of advisors who can navigate financial markets and proactively identify risks and offer solutions.
LM: Why is this the opportune time to prepare for the interest rate shift?
JDP: Interest rates are currently at their lowest levels over the last two decades. This is a great time for individuals to lock in these lower rates for debt consolidation and for their mortgage rates. This is also a great time for people to review their individual portfolios as they relate to their financial goals to make sure that they are appropriately allocated and diversified for this general change in the interest rate environment.
LM: How do you coach investors to ensure their portfolio adapts to an ever-evolving interest rate landscape?
BSC: Regardless of the rate environment, we are sticking with the tried-and-true approach to portfolio diversification. The foundation of our investment philosophy is strategic asset allocation. Strategic asset allocation takes into account a variety of market factors, including a rising interest rate environment. Our focus is to make sure that client goals and risk-tolerance is consistent with their underlying holdings. Within our strategic asset allocation we will make tactical decisions that are focused on taking advantage of current risk-adjusted opportunities in the market. This proactive management approach helps to ensure that we are maximizing returns consistent with the amount of risk our clients are willing and able to take.
The Private Client Reserve of U.S. Bank is located at 425 Walnut Street, Cincinnati, OH 45202. For more information, call 800.727.1919 or visit their website at www.reserve.usbank.com.