Q3 2023 Advisor Insights: Simple Solutions for High-Interest Rates
July 25, 2023 Wealth management
Money Market Funds are yielding 5%. A 10 Year US Treasury Note is yielding just shy of 4%. Thirty-year mortgage rates have floated around 7% in 2023. This is quite the turnaround over the past 18 months.
Interest rates are now as high as we have seen since the mid-2000s – not quite to levels that we witnessed back in the 1970s and 1980s, but certainly a silver lining following a dismal 2022 for capital markets. Below are some simple solutions that many investors should consider as they review their financial accounts this year.
1. Pay Down High-Interest Rate Debt – Many borrowers are immune from higher interest rates, as they refinanced their mortgages at sub-4% interest rates over the past several years. However, many home equity lines of credit and business loans carry a variable rate of interest pegged to the prime rate, which is north of 8% today.
2. Maximize Interest on Checking Accounts – Bank checking accounts became homogenized over the past decade. With minimal interest paid, banks differentiated their product offering by adding free checks, ATM refunds, or identity protection services. Higher interest rates have driven banks to retool their suite of checking account products to entice consumers who want to maximize interest. It is worth a call to your banker or advisor to discuss new checking account options, as well as other bank products like certificates of deposit.
3. Lock in Longer Term Interest Rates – Five-year fixed-income returns are highly correlated to starting yields at the beginning of that five-year time period. With current interest rates in the 5% range for high-quality, intermediate-term bonds, our investment team has been encouraging clients to lock in longer-term fixed-income investments several years out – even if it means sacrificing current interest as compared to shorter-term bond offerings.
Higher interest rates do not necessarily mean that investors should make dramatic shifts to investment allocations. Keeping a reasonable, and tolerable, allocation to stocks should continue to provide investors with long-term inflation protection while providing higher returns than bonds. As an advisor, it is nice to have reasonable alternatives to stocks in order to produce mid-single-digit returns for our clients' short-to-intermediate term needs while also decreasing volatility.
We provide the information in this newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, investment, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.