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Interest Rates Rising

Interest Rates Rising

The Fed has indicated that they will raise short-term interest rates this year, perhaps multiple times. Given that rates are on the rise, how might that affect your portfolio allocation? Is there something that you can do about it?

First, you can always take the long-term view, have a well-balanced portfolio invested for the future, and just stay on course. You don’t have to change anything. Target date funds, total bond market funds, total stock market funds if invested for the long-term future (10+ years) will be just fine. At least, they always have in the past!

That said, it is a unique environment of rising rates which we haven’t seen in a while! Recall that when interest rates rise, bond values fall. Why is that? Tune in to hear an example. We also discuss why you hold cash as part of your portfolio and maybe a couple alternatives worth investigating.

Find out more about Mike at and connect at



[00:00:00] Matt: Welcome to real financial planning, broadcast on WK, Excel, and available. Wherever get your podcasts. We are in Capitol closeup podcast feed. Thank you to of our new and recent subscribers. Your subscriptions really do help us out. And if you haven’t had a chance to do that, I’m joined as always by Mike Morton of Morton financial advice and the host of financial planning for entrepreneurs. 

how are you? 

[00:00:23] Mike: Hey, Matt, I’m doing great today. 

[00:00:26] Matt: That is, you know I take the same approach you when people ask, how are you doing? I say, You know why? a There’s a famous Congressman who wrote a book once he and it was about his experience as a soldier in Korea 1952, the coldest. Right And he was, he describes in the book, was pinned down wounded, under enemy fire. 

People were literally freezing death around him. They had no food and the title of his book. And I haven’t had a bad day since, and that’s how I feel. Each and every day, you know what? It be so much worse on that happy note. Speaking of things, both kind of getting worse and getting better, it’s been an interesting few terms of economic discussions about interest rates. 

And the economy and the news that’s continued to pile up that the fed is looking to raise interest They just confirmed it again, as we record this this week that we’re looking in the first quarter of 2022 at an interest rate So today’s show you wanted to talk about. 

[00:01:32] Mike: interest rates. Let’s it. 

[00:01:35] Matt: Let’s do it. 

Despite the name, people do not find this topic. Interesting. 

[00:01:39] Mike: Wait, what, why can you, how can, find interest rates so fascinating? 

[00:01:43] Matt: it’s not called that because people are like glued to their screens, but it is important obviously as an investor for your own individual portfolio. And it does bring up this question. If interest rates do go up as they like they’re going to do in 20, 22, what you do? 

How do you position your portfolio to deal with that? 

[00:02:04] Mike: Yeah, exactly. Yeah. So it’s great. It’s been in the news and it looks like it’s happening. The question like just said, what do you, do? How do you take that information and make that your portfolio, your investments, your strategy is going to work throughout 2022. So we’re definitely going to tackle that today. 

What are potential moves that want to think about or implement to. Take advantage of current situation. We’re not get destroyed by the current situation. However you want to look at it. So yeah. 

[00:02:36] Matt: It’s just going to ask is, is this going to be a a very short podcast? Cause you’re always telling people take a longterm view. Don’t mess with things too much. Is that just the answer? Are we 

[00:02:46] Mike: yeah. That’s all right. We’re we’re done here. Don’t do anything, 

[00:02:49] Matt: Well for Morton I’ve been, go ahead. I’m sure there’s more to it than that. 

[00:02:54] Mike: Yeah. It is a unique time. do believe so generally. Yeah, we take the long You have a portfolio, hopefully you’ve taken time to review your portfolio. You’re in those target date funds, you’ve got good mix of stocks and bonds for your risk and you are life. And therefore you don’t have to check in quarter or even year in and year out. 

Continue to save and invest for future and let it ride. And that advice holds. So if you do want to tune out, you don’t want to hear any details, if that’s you fantastic. I’m sure you’re going to be in great shape. Come to even the end of the year, no matter what happens this year. 

But in this case, is a unique environment as well, because we haven’t been in rising rates a long time. So there are certain things that you can think about Or do or understand in your portfolio do that. So for one, we don’t even know necessarily what interest rates are going to do. The fed is in charge of, short term interest rates and interbank lending and loading. 

Okay. How that flows through to your borrowing costs, your mortgage, how that flows through to your savings you interest rates, even short term, intermediate term long-term bonds. The fed is not in control of those rates. They come back it flows through the market and individuals supply and demand make up rates. 

So it’s not even foregone conclusion that long-term bond rates will move that much. 

[00:04:22] Matt: I see I see. So For one thing, am I hearing you, You don’t want to over tilt on the news that the fed is going to do something about interest because your own experience may 

[00:04:34] Mike: That’s exactly right. Yep. Exactly. So depending on what you’re invested in, yeah. You’re unexperienced my very So we don’t want to go around and mess with portfolios. We just mentioned that, but let’s talk about why bond rates and interest rates move up and down and especially your portfolio value. Now, the listeners out there might have read this many times that when interest rates rise. 

Bond values, fall 


[00:05:04] Matt: rates 

[00:05:05] Mike: versa. Yup. 

[00:05:07] Matt: values fall. So we would expect that value of bonds in your portfolio, all things being equal would tend to go down this 

[00:05:17] Mike: That is correct. And what I want to do now for a is described to you, Matt and the listeners. Why that you probably read that and I want you to really understand why when interest rates rise. Bond values fall. 

[00:05:31] Matt: This is ringing such a bell from when I was an econ major. And I got to admit I think I missed day. I really do. I think I missed it. This was always the type of thing where I had to go through the exercise, on an exam. And it’s I knew this as a fact, but the whole mechanism it’s like I had reconstruct it by mind this is helpful. 

[00:05:50] Mike: Right now, there is some math this Okay. But I’m going to, I’m going to make the math really simple and straightforward. So I’m not going to dive into the details of mathematics models, but just know that there’s a lot of math behind why this works, but before we can get started, Matt, I need to borrow a thousand dollars from you. 

[00:06:05] Matt: Yeah, no problem. I keep a thousand dollars lying around everywhere next to my gold bars and right underneath my Mercedes. 

[00:06:13] Mike: All If I could just borrow that from you. So that’s going to be our bond. I am borrowing money, a thousand dollars Matt. That’s what you do with a It’s an IOU, it’s borrowing money from somebody or lending them on the other Matt and I are now in a situation he’s lending me a thousand dollars. 

So I’ve got this thousand dollars and I’m going to pay Matt 10%. of. Cause I Matt, so 10% sounds pretty good to me. And so I’m going to pay you a hundred dollars a year. Okay. So I borrowed a thousand. I’m going to pay 10%, a hundred bucks a year. So I Matt’s thousand 

[00:06:47] Matt: just interest. 

right? You’re 


[00:06:48] Mike: That’s just interest That’s 

[00:06:50] Matt: so basically as long as this bond is out there, I make a hundred bucks year. Not bad. 

[00:06:57] Mike: Yeah, that’s right. Yeah. So you gave up a thousand bucks. We were making a hundred a year and eventually I’m going to pay back the thousand, 

[00:07:02] Matt: right All right 

[00:07:03] Mike: So you’re getting a hundred bucks year now, interest rates rise, and I need another bucks and Matt doesn’t a thousand anymore he gave it to me. 

So I go to our good friend, Robyn, and I S I a thousand dollars from Robin, but he says interest rates have gone up. I want to 20%. Okay. 20% of 10%. So I have to pay him $200 a year. So now I’ve got, Matt’s got a bond, an IOU that he’s getting a hundred bucks a year. And Robin has gave me a thousand same thousand, but he’s getting 200 bucks a year. 

Okay. Now, if, if somebody else wants buy Matt or Robin’s bond who’s do you think they’re going to buy. 

[00:07:44] Matt: Yeah, this actually, this is great. is a great example. So basically like we have another friend I’m going to consolidate. It’s like in rounders, like I’ve consolidated your debt, right. Liz, what’s the name of the enforcer in that grandma? So grandma comes around to consolidate debt. 

I see exactly where you’re going with this. So Robin holds a bond that pays him 200 bucks a year. I hold a bond that pays me a hundred bucks a year will de the value of bond is lower than Robbins. 

[00:08:15] Mike: So you’d prefer, so is that as grandma, I’d rather go out to Robbins first I that one’s worth more Robin’s bond is even though he gave same thousand dollars that Matt did, Robin’s bond is worth a lot more, $200 a year, whereas maths is only a bucks a year. So in other words, Matts bond has gone down in value. 

It’s just not worth much anymore. Grandma really wants Robin’s bond. And that’s why when interest rates rise, the principal or the bond value goes down. 

[00:08:46] Matt: So the amount that grandma would willing to pay. For my bond is less than it would have been. Grandma’s a lot happier and would pay more for Robin’s bond 

because interest rates went up. 


[00:09:02] Mike: right So let’s expand it to just the, the overall market. Now we have Many thousands of bonds, you can buy the the entire us bond market. It’s weighted towards governments and short-term bonds, corporate bonds and all kinds stuff in there as well. 

So millions of bonds as interest rates rise, and you put a foul, you put a thousand dollars into that mutual fund. The total us bond market, you invest a thousand dollars as interest rates rise. Your thousand dollars might go down in value. It’s not worth as much. 


[00:09:34] Matt: That makes sense. That makes sense. So here I am as an investor, and maybe I listened to the episode. We did couple of weeks ago on target date. funds. Good episode actually learned a lot, even though I’m already in target date funds. Maybe I went out and bought myself a target date fund. And within that, I’ve I don’t know, 80% stocks, 20% bonds. 

What you’re telling me that 20% is going to go down. Again, all things being equal. My experience may vary, but 20% that’s in bonds, the value in there going to go down. interest rates go up in 

[00:10:11] Mike: that’s exactly right. That is a very real possibility. Now, what do you, what should we do about that? 

[00:10:17] Matt: I’d say Panic and sell off all your bonds. No, 

[00:10:20] Mike: Panic panic and sell everything. 

[00:10:21] Matt: take it. I’ve learned nothing. Guess 

[00:10:26] Mike: Oh my goodness. We got to start over 

[00:10:28] Matt: how I got fired as the host of real financial planning by Mike Yeah, no, That’s clearly wrong. No panic. 


[00:10:36] Mike: So one is, we said at the outset, our interest rates going to rise, how much are they going to rise? We know the Fed’s making some moves. They said they’re making moves. You put in that thousand dollars, does it go to $999? did you read a really not lose very much? 

Or does it go down to, $900? We don’t Okay. So that’s why we have the view set and forget if you’re in a target date fund. Like you mentioned Hey, 20% might be in bonds. What should I do you Hey you can’t really do anything about that because that’s target date fund they’re managing that money for you. 

that view, if it goes down good news, it’s on sale. They’re going to buy more of it because it’s going to come back in the future. Okay. So that’s where we get to the, Hey, you don’t have to do anything, but Mike, I do have bond funds. I do some investing myself. I do my own allocation. 

I got some bond funds. So what are you telling me? I’m telling you that bond values might go down in the short term. So therefore, this is why with my clients currently I’m recommending, let’s not get too heavy on bonds and even hold some cash. 

[00:11:41] Matt: Ah, I see. I see. So let me just read that back you for a second. For most. Who are following a long-term investing strategy? The message is I was being very tongue in cheek. Don’t make any moves, right? Don’t go in and react as if whatever money you have in bonds is being lit on fire. 

It’s not in the long run. You’ll do just fine, especially if you’re in one of these rebalances manages and et cetera. But to the extent that have new money on the margin that you’re looking to invest in, or perhaps you do, as said a little bit of, you’re not just in, in some broad fund you you’re controlling this, you’re curating little bit more. 

You might edge yourself away from where you’re now exposed to that downside risk in bonds. 

[00:12:37] Mike: that’s correct. And it really depends on your personal preference of investing. And let me say it again, another way in the past three or four years, what have we heard Matt interest rates have nowhere to go, by. 

We’ve been hearing that for how long now? And so if I had episode four years ago, maybe you should hold a little more cash. 

People would be like, Mike, you were so wrong. That was dumb. Okay. So that same thing applies today. That’s why I said we have no idea what might happen next interest rates. Maybe it goes up a quarter of one, half a percent and then it goes right back because of whatever happens with pandemic economy. 

Politicians. I don’t know. So in other words, that’s why we have that long-term view that you can do nothing we really don’t know what’s going to happen next again. That said, you to if you worry about these things and you want to tweak things a little bit, my general philosophy, as you’ve heard on the podcast is make small tweaks to take advantage of potential situations, changing things by. 

It’s not panicking selling 20, 30% or a hundred percent. It’s 5% on the margins. So we have a plan and we feel good about plan. So in other words, Hey, Mike, I’ve got a bond fund with $20,000. I’m worried is going to go down 18 or I don’t, I hate looking at it every day. 

Okay. Maybe you take 5,000 of that and put it in. cash. That’s 15,000 still in the bond fund, 5,000 in cash. And you wrote it down. Here’s why I made this move. I’m going to check in each quarter and maybe make a different decision. So that way you’re confident in no matter which way the market goes, still got plenty in the bond fund for if stays steady or goes up still getting that interest. 

I’ve got some on cash that makes me feel better if, and when it does go down just that little bit, Hey, I made a I feel better about that. So in other words, you’ve got a plan going in, revisit that, write it down and be confident in the way that you’re moving forward with your 

[00:14:40] Matt: Got it. So the TV weather guy says, Hey, it might be a storm tomorrow. The reaction is bring an umbrella, not sell your house. So if you are going to bring an umbrella, so you mentioned maybe keep a little bit more in cash. What other we talking here again, in the nature of bringing in umbrella? 

[00:14:59] Mike: Yeah. Actually I want to stick on the cash for a minute because I get this question a lot which is. Why are we holding cash? Like why do I $50,000 just in cash? I know I 

[00:15:10] Matt: to lend to Mike Morton who apparently needs a random thousand bucks in the 

[00:15:13] Mike: the 

thousand bucks now. And then a disclaimer I never borrow money from any of my friends clients. 

It’s not allowed first of all. So the question is, why am holding this cash? Because we know inflation. Mike, just, why am I holding cash? I’m losing out, to inflation and else. I’m certainly not making anything in my savings account. the answer is we just said, because Hey, what’s happened in the last couple of weeks, with the stock market, been pretty volatile. It’s been going down a little bit. Some names been going really going down the overall markets, down a little bit. Luckily I didn’t put that 50,000 into the market because I could have lost a little bit. What about bonds? We just said they might go down by few percent, that 50,000, so OU might lose money there. 

What about cash or cash either? You don’t lose anything. It just sits there. 

So what’s the alternative, again, small percent I’m saying use $50,000 I’m saying that in the context of maybe a 500,000 between your retirement accounts brokerage cetera, et cetera. So this is 10%, you know is sitting 50,000 in cash. 

The reason we have it in cash is to be ready depending on what the markets do next. If stocks fall by 5 10 20%, Hey, we could buy they’re on sale. This big for sale sign just went up in the store, everything 20% off, come and get it now. Oh, luckily I have some cash sitting around. that I can. that bonds go down or the interest rates do rise, Hey, now I can get 2%, 3%, 4%, yeah. I want to take advantage of that. again, getting back to the plan we’ve written down. Here’s why I have $50,000 of cash for these reasons. And then week-in and week-out quarter yearly We can revisit, the plan this is I have money the time to make a move Is the market down 10 or 20? Great. You know And if not, it’s 10% of our portfolio. the market keeps going up this year, we get another 20 gain me No, going to be calling me complaining, Hey, I just made 20% on the 80, 90% I had in the market. Great. That’s why we write these things down and have that plan. 

[00:17:15] Matt: So we have to wrap in just a minute or but anything else in the category of consider if you want to mess around and just be a little bit prepared. 

[00:17:26] Mike: Yep. There’s a couple of things I mentioned. We talked about I bonds before. They’re still great. So I would definitely out that episode we had on I bonds. I don’t remember, but treasury direct is where you can buy to $10,000 of eyeballs person per year. And they’re currently yielding 70%. 

So interest rate over 7%. So again, that 50,000 of cash, well you can take 10. of it You don’t put it into an I bond. And that’ll be great. 

[00:17:52] Matt: Didn’t, you mention off the air about a private debt. 

[00:17:56] Mike: Yeah, private debt is a whole nother thing. I didn’t want to get too much into it there’s a lot of alternatives Matt. So there’s private debt it used to be more for institutional investors, tens of millions of dollars going in working with private lenders where can get 10% 

return on lending money. You lend a few million dollars to a big developer. They develop a skyscraper you’re lending at a 10% interest rate. And so that those are available to more retail investors. Now, then you can certainly look that up. There’s other products, annuity products guaranteed annuity products short terms, one to three years where you can get four or five, six. 

On those products, they each of those things, I just mentioned have different risk and rewards, the private debt, things could go belly up, right? Those projects in the guaranteed annuities, you’re locking money up, know you don’t access to that money. The stock market goes on sale by 30%. 

You’re making 4%, you’ve locked up the money and gotten that 4%. So each of them have different risks. That could really make sense you depending on the situation. There are a a lot of alternatives. Now just go in with eyes wide open and do a lot research understand because the sales pitch, the marketing it’ll look great because people are searching for that yield. 

Hey, I can’t make anything in my savings account. And this guy is telling me I can make 4%. guaranteed. It’ll be a big guaranteed. 4% That sounds awesome. So the marketing materials look really good. Just be careful, you understand all the risks because everything is a trade-off There is no free lunch. Everything has got offs and different products and alternative investments sense to different people depending on your situation. That’s why there’s a lot of different stuff out there. 

[00:19:29] Matt: Great tips, great advice as always, and no one run out and sell your house for Mike Borton. I met Robinson on real financial planning and we’ll see you next 

[00:19:39] Mike: Thanks, Matt. Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or I’d love to get your feedback. If you have a comment or question, please email me at . Until next time thanks for tuning in 

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