Navigating Economic Trends: Harnessing Interest Rates for Investment Success

So today we're talking about economic trends and your investments , and so what does that mean ? So in a world where , let's say , interest rates are rising because inflation is rising , we might want to know what does that mean ? How does that impact my investments ? I'm kind of doing my monthly debit order . I've got my exchange traded fund or my unit trust .

Why are rising interest rates relevant to me ? What's the deal and why do these people keep talking about it in the news all the time ? And so let's just talk about that and , I think , understand that there are little trends in investments and then there are massive trends . So a little trend will be kind of in summer in Europe or in North America .

Lots of people go on holiday , so the volumes of transactions on the stock market tend to go down a little bit . People are a little bit more positive , and so the markets tend to kind of drift upward slightly if there is no big news going on . That's a small trend , it's not a big issue , it's certainly not something you can kind of track or invest in .

But a massive trend would be when we've got a big inflation bubble bursting in the rest of the developed world , for example , and suddenly the cost of living in America or in Europe or in the UK is going up at like 10% or 12% a year .

What will lead from there is that big reserve banks especially in America , because that's the biggest economy and therefore the biggest stock market in the world they will have to do something about inflation . And the biggest weapon that they've got to kind of combat inflation is interest rates .

And kind of the only medicine you can use to really beat inflation is you need to raise interest rates . It's a deeply unpopular thing to do because everybody who's got a home loan , car debts , personal loans , overdrafts , they're going to be really unhappy because the cost of living is going up .

So the cost of their food and all the other things that they have to pay every month is going up already , and now the reserve bank is going to make their home loan costs go up . Their car debt go up as well , so they're really going to get pain .

But unfortunately that is the only real weapon or the only real medicine that a reserve bank has got to combat inflation . What they need to do is they need to raise interest rates to the point where it slows the economy down somewhat and it stops people , especially companies , overspending , and then that will cause prices to start falling , which is good .

That means inflation comes down and then the reserve banks can start to cut interest rates again . The populists , and especially kind of the unions and the populist economists , keep saying that that's a form of punishing the poor . I think that that's just political rhetoric . It's just sensible economic management .

The one thing we don't want to do is live in a world where inflation just goes out of control . If you want to see what that does to an economy , look at Zimbabwe , look at Argentina . It's absolute devastation . So sensible economic management requires us to control inflation .

So when you're an investor and you've got many invested in property companies or just general shares or an exchange-traded fund or a unit trust , and you see interest rates rising , what's going to happen is you're going to see your stock market investments stop growing for a while . In fact , they might actually go down .

If interest rates only rise by kind of 0.25 or half a percent and that's all that happens , then there might be a tiny impact on your investments . But if interest rates go up over a period of months or years by 2 , 3 or 4 or 5 percent , you're going to it's going to be a significant impact on your investments .

What's going to happen is share prices will go down , property prices will go down and so will the price of government bonds . All of those go down because it becomes quite expensive to invest . When you've got debt , companies will start to use more of their cash flow to pay down their debt .

You and me and every other individual out there who has debt might be doing the same . We're going to just logically it's a logical thing to say I need to use more of my monthly income to pay down debt because my debt has become much more expensive and I've got less money to allocate to buy things , to invest , all of those things .

Rising interest rates are very destructive to stock markets and property investments in the short term . It doesn't mean that your investments will never recover or that you've got long-term capital destruction . It's just bad for shares and properties over a shorter period of time .

If you're an investor and you own shares already and you've got a top 40 index or a general equity unit , trust and interest rates are rising , don't panic , keep going , keep investing . If you're a debit order investor or if you've got a LAMSUM , don't worry about it , thinking that you're never going to get back a loss in your portfolio .

You will , because what will happen in the future whether it takes a few months or a couple of years is interest rates will stop rising and then they'll stagnate for a while at a high level and then they'll start to go down again , because that's part of an economic cycle .

Once inflation is under control , the reserve bank will , as fast as they possibly can , start to cut interest rates again . They don't want the economy to go into recession . They don't want the economy to go backwards . They want the economy to grow , and lower interest rates are very good for growing an economy .

Once the pressure is off and once the inflation beast has been killed , then they will quickly drop interest rates . When they drop interest rates , it becomes very positive for shares , it becomes very positive for property and very positive for government bonds as well .

All of a sudden , you start to get a tailwind on your investments and they will start to recover their losses and then start to grow again .

If you see that on a company level , if you look at a retailer , a retailer might have been struggling with high interest rates , where their consumers weren't buying as much as they did in the past and the retailer had debt and was using whatever money it was getting to pay down debt .

When they've paid down their debt and interest rates start to go down , that means the retailers got more money and their customers have got more money . It becomes really positive for the retailer and that happens across cell phone companies , internet businesses , retailers , manufacturers , everybody .

The whole stock market gets a really nice positive tailwind and so does the whole economy . I think you don't understand that when we're looking at a big economic factor like inflation , rising inflation equals rising interest rates , equals pain , but it's short-term pain and it only really damages people who can't stay in the cycle , can't stay invested .

They start to panic or they cash out their investments to pay off their debt . Those that are patient , that can ride out the cycle . The good news is cycle turns . You start to make some money again .

You make up the losses that you might have had from the rising interest rates and then all of a sudden , you get the positive growth of your companies that you own , spurred on by a positive growth in the economy , and good times are here again . That's really what you're waiting for as an investor .

You don't want to be chopping and changing investments based on short-term cycles . You want to be in it for the long term , based on your financial objectives , your goals with your money .

I think for me it's amazing how often we watch these cycles unfold where we see interest rates rising because inflation is going up and then we see the media headline saying oh , blood on the streets and economy is going to go into recession at the end of the world .

And then investors sell out , and they usually start to sell out in their most , in the bulk , just before inflation turns , just before interest rates start to recover and just before the economy starts to grow again and stock markets rise .

So don't be part of that herd mentality and don't get sucked into kind of short-term thinking where people are kind of overly dramatic because they haven't done their investment planning correctly . You can do this yourself by saying I've got a long-term view . The money I'm going to put into shares is five-year or 10-year money .

So I'm going to be investing in times where interest rates are going well , in other words , interest rates are low or they're falling . I'm also going to be investing where interest rates are high or rising and all of that's okay . None of that's going to impact my investment decisions .

I'm going to stay invested and I'm going to benefit from long-term capital growth and understanding . When you're investing in shares , for example , half of your return that you're going to get from the stock market is the dividends that those companies that you own are earning and paying out , and then those dividends get reinvested .

If you're chopping and changing investments all the time , buying and selling all the time , you're not earning the dividends , you're not reinvesting , you're not getting half of the growth that you could , and that happens so often in such big cycles .

It doesn't make sense to me that we don't just stop and look at it and say , hang on , I'm forming part of the herd , yeah , we're going to all run off the cliff together . We're all going to lose money . And the one person who sat at the back going I don't need to sell , I'm not worried about selling , I've got a five-year view .

That's the person making all the money . That's the honest money listener . That's the person that doesn't form part of this big cycle , this big herd behavior , understanding that there are going to be some other big economic trends and economic factors as well .

When economy goes into recession , there's lots of news about it and the newspapers hype it up all the time . To me it's a technical thing . If an economy was growing at 3% and suddenly goes into recession where it's going backwards by 1% . The economy is now shrinking by 1% . That gap from 3% down to minus 1 , that's a big gap .

That's worth understanding because it does have an impact on the businesses that you own . But let's say an economy was growing at half a percent . Now it shrinks and it starts going backwards by half a percent . That difference is not big . It's newspaper headlines , it's radio headlines . It doesn't make a huge difference .

The companies that are operating in an environment where the economy was only growing by half a percent . They're not going to be severely impacted by an economy that's then shrinking by half a percent . For them , the conditions are pretty much the same . It's newsworthy , not investment information .

Be careful when you see recession and that's the kind of a shiny object that's drawing all your attention away from the fundamentals , which might be . We've gone into recession , but interest rates are about to start decreasing . The economy is probably going to start picking up again because investment markets and companies move far ahead of the economy .

If investment markets are anticipating that interest rates are about to start falling again , stock market is going to go up . If you're still stuck on recession and all the bad news and the headlines and you've missed out on good news coming and the future , then you lose out .

I think for me , understanding that economic fundamentals and economic trends are important they are relevant . Newspaper headlines are not Understand that there is very little you can do to influence a big economic trend . What you can do is you can use those economic trends in your favor .

If you've got some extra cash and you see that interest rates are starting to fall , add money as much as you possibly can to investments , because that's going to be good for you .

Equally , if you see interest rates are rising and you've got some debt , start allocating some of the monthly investment money that you were putting in your debit order and start putting that into paying off your debt a bit faster , because that's actually the thing you can do .

You can protect yourself against rising interest rates , where debt is going to really cost you a lot more money and you can take advantage of a cycle that works for you , for me . That's where I pay attention to economic cycles .

I don't pay attention to the headlines and I surely don't sell my high quality investments Again , whether it's a unit trust or an exchange-traded fund , if it's nicely diversified . I'm not selling that because interest rates are going to go up for a bit . I'm just going to ride that out . I want to earn the dividends .

I want those dividends to be reinvested and in the future I will be rewarded for the patience . I hope that helps . Thank you for your questions . Please keep sending them .