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When interest rates rise....
Old 01-28-2004, 09:30 PM   #1
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When interest rates rise....

I'm sure the bull market will have picked up again by the time you read this, but I think Wednesday's market action was an interesting preview of what will happen if interest rates start going up.

Did you notice today that *everything* was correlated? Bonds went down on rising rate fears, of course. Domestic stocks went down, probably driven by fears of the breaking effect on the economy, but also a natural risk premium adjustment vs potentially higher safe yields. International stocks followed US stocks. And all of the interest sensitive real estate instruments got walloped.

Spooky, eh?
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Re: When interest rates rise....
Old 01-29-2004, 03:38 AM   #2
 
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Re: When interest rates rise....

Not "spooky" to me. I just keep cashing my
dividend/interest checks and ignoring what the DJIA
is up to.

John Galt
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Re: When interest rates rise....
Old 01-29-2004, 04:18 AM   #3
 
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Re: When interest rates rise....

Quote:
but also a natural risk premium adjustment vs potentially higher safe yields. International stocks followed US stocks. And all of the interest sensitive real estate instruments got walloped.

Spooky, eh?
Not at all. If you have a plan you won't get spooked! Getting spooked means you'll do stupid things.

If you believe (which I do) that the future will not be any worse than the last 100 years, you'll ride it out.

You are a very smart guy, wabmester but even you could learn something by reading the Swedroe Book I recommended to you. Wouldn't take you more than a few days.

I think it will save you from getting spooked!
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Re: When interest rates rise....
Old 01-29-2004, 07:02 AM   #4
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Re: When interest rates rise....

Cutthroat:
Good point.
My assett allocation plan until about a month and a half ago, was to have as much exposure to equities as I could by buying different types, (Internationals, small caps, large caps, etc. etc.). The only bonds I had were a very small amount that were in the small percentage of balanced funds that I had.
When everything was going great up to 2000, that was a great strategy, but I wasn't on a natural high from it, just considered myself as lucky, and fortunate.
After losing about 45% of my retirement from 2000 to 2003, my emotions were much more on the surface. Losing that much was a hell of a lot worse than the upside was good.
It has never been in my nature to be greedy, and was very upset with myself not to see something had to give.
I was bound and determined, if I got a second chance in the next few years, I would not make that mistake again.
While I am still not up to the amount I started with in 2000, I recently took over half of my equities, and bought conservate bonds (short term and tips).
I really thought i was doing the right thing at the time for my two daughters. My wife and I never had any help from anybody, and at the time of the bull mkt., I thought I would probably be able to break tradition in my family and leave them something when we were gone. (Even with the losses we had during the bear mkt. my wife and I are alright).
I have decided to invest for ourselves, and if there is not a large inheritence, at least (hopefully), they won''t have to worry about us.
If you take out the need for leaving an estate, it truly makes investing much easier, and are able to make age appropriate decisions.(We have no requiremnt to stretch for 9% returns).
Regards, Jarhead

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Re: When interest rates rise....
Old 01-29-2004, 07:39 AM   #5
 
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Re: When interest rates rise....

Not too sure how this will make me look to others, but
I've already spent a fortune on my 3 kids. The only
inheritance I am concerned about is the one I MIGHT
see some day.

John Galt
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Re: When interest rates rise....
Old 01-29-2004, 08:04 AM   #6
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Re: When interest rates rise....

John,

My parents spent my inheritance on my education.

- Alec
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Re: When interest rates rise....
Old 01-29-2004, 09:25 AM   #7
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Re: When interest rates rise....

In our active campground/RV days, the bumpersticker - "I'm Spending My Childrens Inheritance"- was popular.

I did nothing with our balanced index funds during the recent 2000-2002 unpleasantness even though the 60/40 was down 16-17% at one point - mainly because I had precalculated a 1973-74 repeat would would be -22%.

Hobby stocks in DRIP plans were different - when interest fear sent Con ED from 40 to 25, I bought more so those $ - with compounding are yielding 11%. Drops in my 'hobby stocks' are buying opportunities since my holding period is forever, unless they go bankrupt or get merged out of existance - like a lot of my water utilities.
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Re: When interest rates rise....
Old 01-29-2004, 11:34 AM   #8
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Re: When interest rates rise....

Quote:
Did you notice today that *everything* was correlated?
Well, I think more things are more highly correlated than people think, but this also plays into my assertions that almost everything is somewhat overpriced these days, hence any sudden moves make everything shiver a little while the participants try to figure it out.

My REIT and European holdings went up, but everything else I hold took a very minor drop. Fortunately my 3 week old portfolio readjustment had run up enough black ink to take this and a lot more before I go into the red.
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Re: When interest rates rise....
Old 01-29-2004, 12:47 PM   #9
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Re: When interest rates rise....

Although the logic side of me says not to fret when the roller coaster goes down, the emotional side always has a hard time visualizing that bright horizon in the future when things go up and the long term plan is working. Life was much simpler when there was less instantaneous info, all these web account spreadsheets and the like tend to drive me a little crazy as I can't help but look at the portfolio day to day. Is it just me or do any of you guys get caught up in this daily measurement syndrome :??

Doug
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Re: When interest rates rise....
Old 01-29-2004, 01:19 PM   #10
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Re: When interest rates rise....

The emotional side is always there and I usually watch the markets everyday - but I don't act on it and try not to 'mark to market' my portfolio. Downdraft's are always good for pulling my chain. Took a while to learn to just stand there and let (in our case) balanced index do it's thing.
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Re: When interest rates rise....
Old 01-29-2004, 02:45 PM   #11
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Re: When interest rates rise....

I look every day. I expect the anticipation of it being after 3pm PST and running to check the portfolio is only a shade of gray away from what gamblers experience

I dont use it to time either, although I just got back in touch with an old friend and read his missive on the global energy situation and its possible implications during my withdrawal period. I may be buying some Vanguard Energy a little sooner than I had planned, but i'd like it to come down to at least 29 and ideally below 27 before I buy it. Can I just follow suit and call this sort of activity "hobby money/stocks" and not feel like a dirty market timer?
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Re: When interest rates rise....
Old 01-29-2004, 03:43 PM   #12
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Re: When interest rates rise....

Sure - why not

Just make sure the short end of stick is covered - i.e. the core budget/expenses - via SEC yield, a SWR method, or other(pension, rental income,etc.).

Then you can do 'hobby stocks', core and explore, or use your own moniker. I really think the male brain is wired to do this.
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Re: When interest rates rise....
Old 02-01-2004, 07:24 PM   #13
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Re: When interest rates rise....

UncleMick, this isn't a gender thing, few women in our generation were encouraged to excel in mathematics or analytical fields. I was a rare Duck in Deady Hall back in the early 60's. I enjoy the mutual fund selection process.

One resource I use is the discussion board at Fund Alarm.
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Re: When interest rates rise....
Old 02-02-2004, 04:27 AM   #14
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Re: When interest rates rise....

Gender thing? How about the media articles that surface periodically - when women do get interested in investing - they tend to do better than men - ? because they tend to hold longer, trade less, and don't get into "story' stocks/sectors as much? I have no idea if this true but I know in my case, the tendancy to trade has to be resisted.

In the last of my hanging around the water cooler days - we had one female engineer - "Home Depot boys - Home Depot is going to put our kids thru college - I won't let my husband sell".
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Re: When interest rates rise....
Old 02-02-2004, 05:04 AM   #15
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Re: When interest rates rise....

I guess it's inevitable that Greenspan will raise rates sometime this year. Is or has the stock market discounted that fact yet ? Or will stocks drop after the fact ? And when do you guys think he'll raise rates ?
What does everyone think about stocks for 2004 - up or down by the end of the year ?? Larry Kudlow is still bullish; I'm hoping/betting that he's right.
The past two weeks have not been good for my Vanguard funds. Fortunately my 'hobby' stocks ( as some call them ) are doing ok.
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Re: When interest rates rise....
Old 02-02-2004, 06:52 AM   #16
 
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Re: When interest rates rise....

I think it's a slam dunk that interest rates will go up
in 2004. I'm betting not by much. For stocks, I'm
guessing sideways this year, but that is the wildest
of SWAGs.

John Galt
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Re: When interest rates rise....http://yahoo.smart
Old 02-02-2004, 10:23 AM   #17
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Re: When interest rates rise....http://yahoo.smart

I suspect that stocks will end the year up because of the nascent economic recovery. Of course, the market seldom pays any attention to my opinion.

If you think rates will rise, and wanted to make a play on the rising interest rates, there are mutual funds that gain value when interest rates rise:

http://yahoo.smartmoney.com/fundscre...1107&afl=yahoo

Of course, if rates go down they will lose money.

Mike
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Re: When interest rates rise....
Old 02-02-2004, 11:27 AM   #18
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Re: When interest rates rise....

These are pure WAG's... but at year end bond fund total returns will be flat. Large stocks will be up slightly (3-4%) but small caps will continue to climb. Would I change my investments based on my hunch? H*ll no! I'm not that smart even when I have the answer key...

-Jay

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Re: When interest rates rise....
Old 02-02-2004, 08:26 PM   #19
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Re: When interest rates rise....

The trick to predicting something is to predict far enough into the future that nobody can remember to check on your accuracy, so....

The stock market for the next 20 years will be basically flat. It'll look a lot like the period from 1962-1982 in this graph:

http://finance.yahoo.com/q/bc?t=my&s...=l&c=&c=%5ESPX

Interest rates will similarly follow the graph, but without going over 10%.
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Re: When interest rates rise....
Old 02-03-2004, 07:15 AM   #20
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Re: When interest rates rise....

I am thinking that you are basing your prediction on valuation. Reversion to the mean has always occurred in the past, so it makes sense to allow for the possibility that it will happen again this time. The market has also been very volatile in the past, so this reversion period may also contain many years of double digit gains, as well as double digit losses. We could even have several more up years before several down years bring the valuations down to the lower end of their historic range.
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