Interest Rate Hike: What should you do?

For the second time this year the Federal Reserve has seen enough encouraging economic metrics to justify an interest rate hike. Supposedly this will be the second of three this year if the economy remains on course. But will it?

This week’s quarter-point rate hike was miniscule, but what happens if enough rate hikes eventually amount to something bigger?

A recent article in the Huffington Post points out that meaningfully elevated interest rates would probably be catastrophic to an economy that has now become dependent on cheap credit.

What does this mean for you… the individual investor? TransUnion estimates that 8.6 million borrowers were unable to absorb the payment increase the last time the Fed raised rates in December. TransUnion said, “Another full percentage point hike from here could cause 2.5 million consumers to be in danger of not being able to keep up with payments.”

American consumers now hold over $3.8 million in total debt. Almost 25% of that debt is revolving debt (credit cards and lines of credit). That type of debt will be impacted immediately with this latest interest rate increase.

Big banks and billionaires have already moved their money around in anticipation of this news. What are you doing about it?

Traditionally, a rate hike by the Fed is considered a sign of economic health.  But what if the economy is not as healthy as the manipulated indicators say and rates are hiked anyway?  If the economy connot truly handle it, it could be catastrophic.

A rate hike would mean a slightly higher return on savings, but will that offset the risk that massive swaths of debt becomes unserviceable?  If that happens, the resulting defaults could put the economy at higher risk.

The IMF is estimating over 20% of US corporations could go bankrupt under these circumstances.  An additional 0.5% return on a certificate of deposit would be little consolation in an economy with that many businesses shuttered.

WHAT YOU CAN DO WITH YOUR PERSONAL INVESTMENT PORTFOLIO

Historically, rising interest rates have been correlated with higher prices for gold.  Higher interest rates mean real estate is more expensive by definition.  Credit card debt and student loan debt will most likely face higher rates of default.  With the stock market at historic highs, how much higher can it go?

Take the time today to make your investment portfolio a Defensive Portfolio.  Prepare for the rising interest rate environment we are now in.