High rates of interest don’t just affect bondholders. Even corporations that took advantage of relatively low borrowing costs to expand over the past decade have felt the pain of rising rates of interest. The NASDAQ Composite Index, which primarily represents technology stocks, fell greater than 32% in 2022 as a consequence of rising rates of interest.
However, there have been some shiny spots amid rising rates of interest lately. The first was the common-or-garden Guaranteed Investment Certificate (GIC). At the beginning of 2022, you possibly can buy one-year GICs with 1.5% interest. At the tip of the yr, one-year GICs paid greater than 5% interest. Five-year GICs saw an analogous rise in rates, rising from about 2.5% to five% by the tip of 2022.
Why persistently high inflation worries investors
Like the Bank of Canada, other central banks around the globe have raised their key rates of interest in an try to bring inflation back to the low and predictable levels we’ve grow to be accustomed to during the last 30 years.
Both the Bank of Canada and the U.S. Federal Reserve have said persistently high inflation poses a greater threat to the economy and livelihoods than the short-term pain of increased rates of interest and a slowing economy. They wish to avoid in any respect costs a repeat of the painfully high inflation period of the Nineteen Seventies, which is why rates of interest rose so sharply and stayed there until central banks were confident that inflation had been suppressed.
That looks like the good choice, considering that stock and bond prices are all about future expectations. Low, predictable inflation allows businesses and consumers to confidently make spending and reinvestment plans. Persistently high inflation brings uncertainty, leading to volatile fluctuations in asset prices.
The best scenario is a soft landing through which inflation returns to its 2% goal without the economy slipping into recession.
What investors can do to guard their retirement savings
If you’re retired, near retirement, or still a couple of years away but planning your retirement funds, fear of the high inflation of the past few years could also be keeping you up at night. How are you able to minimize the impact in your purchasing power now and in the longer term?
According to Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital in Ottawa, diversification is the most effective defense. In an episode of her investment podcast: Rational memoryFelix said investors can reduce the danger of their entire portfolio having no or negative real return by holding more sources of expected returns of their portfolio. This includes value stocks, domestic and international stocks, and stuck income securities where this is sensible within the portfolio.
