Will interest rate raises affect your portfolio?

Interest rates are rising around the world.  Markets have increased dramatically since 2009, and a lot of people put that down to low interest rates and QE from central banks.  How true is this?

Before we go into that, we have to realize how undervalued the S&P and other major markets were in 2009.  The 00s were the first decade where on the last day of the year (December 31 2009) markets were below where they were on the first day (January 1, 2000) in real terms.  Even in the 1930s, a combination of deflation after the great depression and markets recovering after 1933-1934, meant that a patient investor had more in his or her account at the end of the decade, at least adjusted for the deflation.

Any measure of value shows how low markets were in 2009.  Takes the price to earnings ratio, which is one of the best measurements of how `fairly priced` markets are, given that it looks at the stock market versus the revenue of the firm.  The S&P price:earnings ratio went as low as 12, and was under 20 until 2015.  We are now at around 26. By historical standards that is high but nowhere close to where we were in 1999 before the stock market crash.

Ultimately, with inflation running at 2%-3% or more, interest rate rises to 1%-2% aren’t attractive enough to investors.  Importantly, for long-term patient investors, this is close to irrelevant.  As Warren Buffet once said, the Dow will probably go to 1M, so whether you buy at 26,000 and it goes down to 15,000, or it goes up next month, that is close to irrelevant.  Markets tend to rise over time, so a patient investor shouldn’t care about what happens in the meantime.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s