When It Comes to Rising Interest Rates, Speed Is the Key
By John Mylant, founder and CEO of OptionsWeekly.Org
NEW YORK (TheStreet) -- One of the biggest fears among financial market participants is rising interest rates, but I don't think they're all that bad.
Sure, I realize that as bond yields rise, they could hurt variable loan rates and possibly stifle economic growth. There is no doubt that some investors will struggle in the short term, as they have this summer with the recent spike in rates. Some have seen dividend returns go down, while others have seen mutual funds do the same.
But if investors hold out long enough, those assets will come back and things will get better.In the long haul, the only people who really will be hurt are those who are thinking short term and making their "paper loss" an actual one by selling their holdings. I'd like to see the bond markets develop and move on their own without intervention from the Federal Reserve. The "artificially low rates" that have been created by the central bank's quantitative easing programs have hurt many conservative investors. It has been particularly hard for retirees, who are getting miniscule returns. When you factor in inflation, sometimes even a bond investment can be a losing proposition. Higher rates will allow retirees to get a better return on their conservative investments without taking more risk. I realize that rising rates may mean short-term pain, but I believe the S&P 500 and the Dow Jones Industrial Average will be better off for them in the long run. There is a lot of cash sitting on the sidelines doing nothing, and I believe the holders of this cash would love to see interest rates go up so they can get back into the markets. Bonds have not been a viable alternative to investing in stocks for a long time, and higher interest rates could create better competition between bonds and stocks, leading to steadier market growth. I cannot say for sure, but if interest rates go up at the right pace we may see many "knee-jerk reactions" in the markets that will provide buying opportunities for bonds and stocks.
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