Coming off an extraordinary year for equities, 2014 has started off incredibly, and expectedly, rocky. I have been watching as the market indices and the market's fear gauge -- the VIX -- or volatility index, move up and down like yo-yos.
To make educated decisions, investors can't ignore macroeconomic principles and must also revisit history for clues as to behaviors that might repeat themselves. In the U.S. we have been in a period of declining interest rates for so long, that many investors and financial advisors don't realize how a rising interest rate environment will effect portfolios. I found this article in the Wall Street Journal from January 20th to be quite relevant and timely. It describes how young people working in the financial industry are looking toward veterans in the industry for insight on how a rising interest rate environment will affect them and their clients.
I will repeat a few interesting quotes here: "Many advisers have been through at least one big stock-market swoon. But
many haven't been practicing long enough to live through a sustained
period of rising interest rates. ... Rates have risen for relatively brief periods in the past couple of
decades, for instance in 1994. But financial professionals say that the
conditions they are girding for now haven't been seen since the early
1980s—significant rate increases likely to last for several years and
affecting prices of bonds and bond-based mutual funds. That brings the
risk that investors could be hit with negative returns."
We live in interesting times.
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