For the majority of the past 14 years, long-term investors have enjoyed an extended period of low interest rates. Following the end of the global financial crisis in 2008 – perhaps one of the worst market declines in recent history – from 2009 to 2021, stock markets experienced predominantly bullish conditions.
This period is especially notable for how easy it was to access low-cost credit. Optimism and capital were both in plentiful supply, creating the impression that money was, essentially, “free”. But as Isaac Newton taught us: what goes up must come down.
After the Covid-19 pandemic began to take hold, central banks and governments implemented measures to protect jobs and businesses. But these interventions coupled with the specific challenges that the pandemic created soon led inflation to rise sharply. It has remained elevated for much longer than economists initially anticipated.
To combat inflation and the harmful effects it can have on consumers, investors, and businesses, central banks raised interest rates. In recent months, inflation seems to have fallen from its peak, although there is still a way to go before it reaches acceptable levels. This means that interest rates are likely to remain elevated for some time.
That’s not good news if you’re a long-term investor because it could mean that you need to alter your financial habits to adjust.
Current conditions could lead to difficult decisions for investors
When interest rates are low and credit is readily available, it’s easier to take a more relaxed approach to your finances. Money tends to go further at times like these, so you usually enjoy more discretionary spending.
But as those rates rise, it will become more important to stay focused on your long-term goals if you’re to build up enough wealth to be able to achieve them. Even the smallest actions you take today could affect your financial position in 10, 20, even 50 years from now.
The golden rule of financial success is to live within your means
For many, rising mortgage rates or rent costs will make it difficult to live within their means. Household budgets are already stretched by the combination of elevated, albeit falling, inflation, and increased interest rates. Moreover, a great deal of your wealth may be invested in your home, which might be directly affected by the interest rate rises of recent months.
All of this could lead to a difficult decision: to cover your rising mortgage or rent costs, will you reduce your discretionary spending or your investment contributions for the future? It’s not a choice that any investor wants to make.
As consumers tighten their belts and reduce their discretionary spending, businesses start to be affected too. Their profits may suffer as fewer customers shop with them, and as business loans are more tricky to secure, they may be investing less in business growth.
The leaders of the companies that you invest in through the stock markets are nothing if not adaptable. They will be working hard to ensure that their business continues to thrive, and deliver positive returns on your investment, over the long term. The short-term uncertainty may be difficult to navigate, but the long term must remain the focus.
Higher interest rates provide the opportunity to improve your financial habits
There’s no denying that recent months have been extremely challenging for consumers, investors, and businesses alike. But what if you were to view the uncertainty as an opportunity to review how you manage your money and renew your commitment to your goals? This mindset shift could enable you to navigate the current climate with confidence.
Since your wealth is a tool for affording the lifestyle that you truly desire, inflation might be the biggest challenge that you must overcome in planning for the future. The last two years have shown just how true this could be.
Consequently, it’s important to regularly review your portfolio with your financial planner to make sure you have invested in the most appropriate asset classes for your circumstances. This could give you the greatest potential to outpace inflation and grow your wealth.
Moreover, the increase to interest rates means that you may be confronted with the need to be very selective about the loans that you take out. Remember, the actions you take today could very well affect the outcomes you have in the future.
Staying focused on your goals and remaining disciplined when making your decisions for today are two financial habits that could help you set yourself up for success in later life.
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If you’re concerned about how inflation and interest rate rises could affect your wealth and your ability to achieve your financial goals, we can help.