Federal Reserve chair Jerome Powell on Friday gave the\u00a0clearest indication yet\u00a0that the central bank is likely to start\u00a0cutting interest rates, which are currently at their\u00a0highest level\u00a0in two decades.<\/p>\n
If a rate cut comes in September, as experts expect, it would be the first time officials have trimmed rates in over four years, when they\u00a0slashed them\u00a0to near zero at the beginning of the Covid-19 pandemic.\u00a0<\/p>\n
Investors may be wondering what to do at the precipice of this policy shift.<\/p>\n
Those who are already well diversified likely don\u2019t need to do much right now, according to financial advisors on CNBC\u2019s\u00a0Advisor Council.<\/p>\n
\u201cFor most people, this is welcome news, but it doesn\u2019t mean we make big changes,\u201d said Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, based in Irvine, California.<\/p>\n
\u201cIt\u2019s kind of like getting a haircut: We\u2019re doing small trims here and there,\u201d she said.<\/p>\n
Many long-term investors may not need to do anything at all \u2014 like those holding most or all of their assets in a target-date fund via their 401(k) plan, for example, advisors said.<\/p>\n
Such funds are overseen by professional asset managers equipped to make the necessary tweaks for you.<\/p>\n
\u201cThey\u2019re doing it behind the scenes on your behalf,\u201d said Lee Baker, a certified financial planner and founder of Claris Financial Advisors, based in Atlanta.<\/p>\n
That said, there are some adjustments that more-hands-on investors can consider.<\/p>\n
Largely, those tweaks would apply to cash and fixed income holdings, and perhaps to the types of stocks in one\u2019s portfolio, advisors said.<\/p>\n
In his keynote address on Friday at the Fed\u2019s annual retreat in Jackson Hole, Wyoming, Powell said that \u201cthe time has come\u201d for interest-rate policy to adjust.<\/p>\n
That proclamation comes as inflation has fallen significantly from its pandemic-era peak in mid-2022. And the labor market, though still relatively healthy, has hinted at signs of weakness. Lowering rates would take some pressure off the U.S. economy.<\/p>\n
The Fed will likely be choosing between a 0.25 and 0.50 percentage-point cut at its next policy meeting in September, Stephen Brown, deputy chief North America economist at Capital Economics wrote in a note Friday.<\/p>\n
Lower interest rates are \u201cgenerally positive for stocks,\u201d said Marguerita Cheng, a CFP and chief executive of Blue Ocean Global Wealth, based in Gaithersburg, Maryland. Businesses may feel more comfortable expanding if borrowing costs are lower, for example, she said.<\/p>\n
But uncertainty around the number of future rate cuts, as well as their size and pace, mean investors shouldn\u2019t make wholesale changes to their portfolios as a knee-jerk reaction to Powell\u2019s proclamation, advisors said.<\/p>\n
\u201cThings can change,\u201d Sun said.<\/p>\n
Importantly, Powell didn\u2019t commit to lowering rates, saying the trajectory depends on \u201cincoming data, the evolving outlook, and the balance of risks.\u201d<\/p>\n
Falling interest rates generally means investors can expect lower returns on their \u201csafer\u201d money, advisors said.<\/p>\n
This would include holdings with relatively low risk, like\u00a0cash held in savings accounts, money market funds or certificates of deposit, and money in shorter-term bonds.<\/p>\n
High interest rates have meant investors enjoyed fairly lofty returns on these lower-risk holdings.<\/p>\n
It\u2019s kind of like getting a haircut: We\u2019re doing small trims here and there.<\/p>\n
However, such returns are expected to fall alongside declining interest rates, advisors said. They generally recommend locking in high guaranteed rates on cash now while they\u2019re still available.<\/p>\n
\u201cIt\u2019s probably a good time for people who are thinking about buying CDs at the bank to lock in the higher rates for the next 12 months,\u201d said Ted Jenkin, a CFP and the CEO and founder of oXYGen Financial, based in Atlanta.<\/p>\n
\u201cA year from now you probably won\u2019t be able to renew at those same rates,\u201d he said.<\/p>\n
Others may wish to park excess cash \u2014 sums that investors don\u2019t need\u00a0for short-term spending\u00a0\u2014 in higher-paying fixed-income investments like longer-duration bonds, said Carolyn McClanahan, a CFP and founder of Life Planning Partners in Jacksonville, Florida.<\/p>\n
\u201cWe\u2019re really being aggressive about making sure clients understand the interest-rate risk they\u2019re taking by staying in cash,\u201d she said. \u201cToo many people aren\u2019t thinking about it.\u201d<\/p>\n
\u201cThey\u2019ll be crying in six months when interest rates are a lot lower,\u201d she said.<\/p>\n
Bond duration\u00a0is a measure of a bond\u2019s sensitivity to interest rate changes. Duration is expressed in years, and factors in the coupon, time to maturity and yield paid through the term.<\/p>\n
Short-duration bonds \u2014 with a term of perhaps a few years or less \u2014 generally pay lower returns but carry less risk.<\/p>\n
Investors may need to raise their duration (and risk) to keep yield in the same ballpark as it has been for the past two or so years, advisors said. Duration of five to 10 years is probably OK for many investors right now, Sun said.<\/p>\n
Advisors generally don\u2019t recommend tweaking stock-bond allocations, however.<\/p>\n
But investors may wish to allocate more future contributions to different types of stocks, Sun said.<\/p>\n
For example, stocks of utility and home-improvement companies tend to perform better when interest rates fall, she said.<\/p>\n
Asset categories like real estate investment trusts,\u00a0preferred stock\u00a0and small-cap stocks also tend to do well in such an environment, Jenkin said.<\/p>\n<\/p>\n
Federal Reserve chair Jerome Powell on Friday gave the\u00a0clearest indication yet\u00a0that the central bank is likely to start\u00a0cutting interest rates, which are currently at their\u00a0highest level\u00a0in two decades. If a rate cut comes in September, as experts expect, it would be the first time officials have trimmed rates in over four years, when they\u00a0slashed them\u00a0to […]<\/p>\n","protected":false},"author":0,"featured_media":8520,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-8519","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business"],"_links":{"self":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts\/8519","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/comments?post=8519"}],"version-history":[{"count":0,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts\/8519\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/media\/8520"}],"wp:attachment":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/media?parent=8519"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/categories?post=8519"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/tags?post=8519"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}