THE PRICE OF MONEY
by Brian Murphy, Market Strategist
In the Frazier Investment Management Blog, we try to bring a touch of humor and entertainment to the otherwise dry subject of Finance.
Unfortunately, this month we will be discussing Interest Rates. But wait! Resist the urge to stop reading here because this subject might be the most important factor in the economy, markets and capitalism in general. Interest rates are, put simply, the price of money. That price- that little number with a decimal point you see everywhere from TV to newspapers and computer screens has a direct influence on human behavior. Interest rates determine the car you drive, the house you live in and, of most importance to us, the way you invest.
Note in the chart above where short term interest rates were in the early 80s (almost 20%) then look at today (pretty much zero.) I still hear echoes of the trauma of high interest rates from my parents who were considered successful professionals, but could barely own a working vehicle at one point in time. Fast forward to today and it’s “Yay free money! This is great!” Well it is great when you go to finance your house or car, but it’s not great if you are trying to save, invest conservatively and earn a respectable yield on your money.
This has been the conundrum for us at Frazier, and every money manager in the world for that matter. Stocks are inherently risky and subject to occasional drawdowns. Bonds and other fixed-income assets have traditionally been used to hedge portfolios, produce predictable income and smooth out returns. But with interest rates near zero, fixed income may not be the hedge it once was and it certainly isn’t producing a lucrative income stream.
But wait! We’re not ready to give up. At Frazier we are doing a few things to mitigate the risks in the non-stock portion of portfolios. We generally are not adding to longer dated instruments at this time because if rates come off zero or the yield curve steepens, their value may decrease. While short-term bond holdings are not yielding much, if interest rates rise, they can be quickly rolled over into higher yielding debt. We see opportunities in municipal bonds for our high tax-bracket clients. Finally, we are not afraid of a small cash balance because there is so little opportunity cost unless inflation rears its head and the Fed is forced to raise rates.
It’s a tough investing environment, but if you want to complain about low interest rates, don’t do it to my parents. I can predict with 100% certainty what they’ll say- “Be careful what you wish for!”
*Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
*All information and data are believed to be from reliable sources; however, we make no representation as to its completeness or accuracy