Yesterday’s Rate Hike

The U.S. Federal Reserve Board’s Open Market Committee just raised the Fed Funds rate from 0.75% to 1.00%—the second rate hike in three months.  So what should you do with your investment portfolio in light of this change?


Why?  First of all, the rate change was laughably minor, considering all the press coverage it received.  In the mid-2000s, Fed Chairman Alan Greenspan raised interest rates 17 times in quarter-point jumps, finally taking Fed Funds to a 5% rate.  This time around, the economists at America’s central bank are behaving extremely cautiously.

Second, although you may read that any raise in interest rates is depressing for stocks.  It’s true that borrowing will be incrementally more expensive for American corporations than they were last week.  But bigger picture, this move was actually a validation of the country’s economic progress in our long slow climb out of The Great Recession.

By raising rates, the Fed was indicating that it believes the companies that make up our economy are healthy enough to survive and prosper under slightly higher interest rates.  The markets apparently felt like this was a positive sign, that the economy no longer needs to be nursed back to health.  The widely-followed S&P 500 stock index rose a full percentage point on the news.

Third, and more good news, the Fed has now moved into a mode where it is fighting inflation, rather than trying desperately to stimulate it.  The worst thing that could happen to the economy is a bout of deflation, where prices fall and there are no policy remedies to fix the problem.  In the discussion accompanying the rate rise (the infamous Fed “minutes”) the Board of Governors expressed concern that inflation might rise above their “target” of 2%, hence the tightening.  If you read the message between the lines, they seem to feel that the threat of deflation is over.

Finally, the rate hike was expected, and already built into the price of stocks.  And more still are expected: at least two and possibly three 0.25% rises before the end of the year.  But the Fed also signaled that if there is any sign of backtracking, those plans will be scrapped.  The rate rises are anything but reckless.

So what WILL be the effect of the rate hike?  Borrowing to buy a car or a house will be slightly more expensive going forward than it was last week.  The average thirty year fixed mortgage rate this time last year was 3.68%; it’s now up to 4.21%.

Most credit cards charge variable rates of interest, which likely means a 0.25 percent rise in the rates you pay on any balances you carry from month to month.

And private student loans with variable interest rates will likely increase each time the Fed raises rates.  Balances on Stafford, Graduate Plus or Parent Plus loans will remain at their current interest rates, but the rates on new loans will probably rise.

If your portfolio is well-diversified, there’s not much more you can do to ride out a (slowly) rising-rate environment.  Ignore the headlines and celebrate the fact that even the most cautious economist in Washington are finally admitting that the economy is on solid ground.



The Power of a Long-Term Vision

“Vision is the art of seeing what is invisible to others.” – Jonathan Swift

How does one become a success in life? Easy- set your goals, and get to work on achieving them. What are the best goals to set though? Will achieving just those goals make you successful? What is success anyway? Okay, maybe this is not going to be so easy after all… What are we missing?

Not Goals, Vision

We tend to hear about goal setting in almost ever discipline imaginable where human beings are striving for success. We are told that we need to set goals, we need to pursue goals, we need to achieve goals- however, there is a piece missing here. We are working towards something, but we have not determined what the bigger picture is.

This is because goals are great at answering the HOW of what we are doing, but not the WHY.

This is where we need to have a vision. A vision is the why of what we want to achieve in life. It is the concept that addresses our underlying passions, values, motivators, and beliefs, and allows us to incorporate them into the impact we have on the world, and the value that we create for ourselves and others.

The Why Of The Why

Okay, so vision addresses the why behind what we do, but why do we really need to know that? Isn’t it enough to know that the process of setting and achieving our goals will move us forward?

The problem isn’t that we are spending too much time trying to set or fulfill our goals. Goals are a vital part of achieving success, but without vision they are incomplete. They lack direction. This is because typically our goals are based on a measurement of where we are now, or where we have been. We use these metrics to help us figure out where we can be begin to build, and what we can realistically hope to achieve over a short, medium, or even a long period of time. A vision encourages us to step outside of our current situation, and consider the broadest possibilities for ourselves and our lives.

The How Of The Why

Creating a long-term vision is not an easy thing though. Not unlike any skill, creating a long-term vision requires practice, discipline, and perseverance, and will likely change as we become better at defining what we value. This starts with asking ourselves tough questions about who we are and what is truly important to us.

As an exercise, try sitting down with a blank piece of paper and a pen. Begin by jotting down as many of the goals or achievements you have set for yourself that you can think of, and examine them closely. Now, challenge yourself to come up with some reasons that these goals are important to you. What are you hoping to get out of achieving these goals? What are you hoping these goals will do for you? Try to be as specific as possible. See if you can break these thoughts down even further, identifying some of the “whys” that are beneath these goals you have set for yourself.

Once you have done this, try to imagine a time in the future in which you have completed all of the goals you have just written down. What will you be like? What value will have been added to your life and to the lives of the people around you because of these experiences? What kinds of new opportunities might these create for you?

Congratulations, you have just begun to step outside of your day-to-day reality, and started to think in terms of possibilities.

“Vision is a picture of the future that produces passion.” Bill Hybels