The downside to rising interest rates is how it can impact borrowers. Many Canadians are saddled with high debt with mortgages and lines of credit. Those with variable mortgage rates have already felt the sting of higher rates, while those fortunate enough to still hold a fixed-rate mortgage under 3% will face the prospect of renewing at much higher rates when their term expires.
What can investors do to protect their retirement savings now?
Young investors with a long-time horizon will likely benefit from staying the course with a sensible, risk-appropriate portfolio. In fact, those in their accumulation years should be elated that stock and bond prices have fallen significantly—it means they can purchase more shares at discounted prices.
For those in retirement or nearing retirement, the current environment can be more of a challenge. It’s a good time for investors to revisit their capacity for risk. The few years leading up to 2021 saw massive speculation in risky assets such as crypto, NFTs and meme stocks. Even the most disciplined investor may have strayed from their core portfolio due to FOMO. Then 2022 hit, and those risky assets saw the largest drawdowns. It’s a lesson to stay true to a risk-appropriate portfolio in good times and bad to avoid buying high and selling low.
Then there’s the question of bonds. Retirees and soon-to-be retirees got a shock last year when their bonds fell just as sharply as stocks. The lesson in a rising-rate environment is to hold shorter-duration bonds that are less sensitive to interest rate movements. Further to that, GICs and high-interest savings accounts finally offer decent yields of 3% to 5% interest—perfect for short-term spending needs and for queuing up expected withdrawals from RRIFs over the next one to five years.
Finally, many retired investors still hunger for yield and gravitate towards dividend stocks and ETFs, along with monthly income funds. More recently, ETFs with a covered call writing strategy, such as Harvest ETFs’ call option ETFs, have emerged to provide higher, tax-advantaged monthly income for those seeking higher yields.
What happens when interest rates fall again?
No one has a crystal ball, but with inflation starting to recede, there’s a growing sentiment that we’re at or near the top of this rate-hiking cycle. What happens next is anyone’s guess, but the clues will be in how quickly inflation gets tamped down and whether the central bank’s relentless pressure pushes the economy into a recession. If that happens, watch for interest rates to fall modestly to stimulate growth.
A drop in rates will be good news for bond holders as they look to recover their losses from 2022. The bad news for savers is that we’re likely at the high point of GIC and HISA interest rates. Watch for these to tick down when the Bank of Canada pauses or reduces its key lending rate.
What should investors do about inflation?
We should acknowledge that 2022 was an unusual year, one that saw double-digit declines in both stock and bond prices after a series of rapid interest rate hikes by central banks around the world.
Sumber: www.moneysense.ca
