HOW RISING INTEREST RATES AFFECT HIGH-NET-WORTH INDIVIDUALS
Modern society has become accustomed to interest rates falling. In 1981, interest rates stood at around 16% but, in the four decades since, we’ve seen them trend downwards until they hit a record low of 0.1% during the COVID-19 pandemic. But times are changing as, in response to historic inflation increases and rising prices, we’re now seeing a reversal in this trend.
Interest rates are rising due to a combination of factors, including geopolitical issues, supply chain shortages, workforce challenges, and increasing food and energy prices. Higher rates could result in new mortgages going up in price, peoples’ existing monthly payments increasing, and potential decreases in the cost of new homes.
But while rising interest rates may sound like all bad news, the UK’s competitive market means lenders are vying to attract the best borrowers. Therefore, ultra-high-net-worth individuals could have the upper hand in securing the best deals.
Why are interest rates rising?
To understand why interest rates and inflation are rising, it’s first vital to understand how the economy works. As Ray Dalio explains, the economy may seem complex but understanding its mechanical processes and factors like short- and long-term debt cycles can help to simplify this.
We’re arguably in the midst of a short-term debt cycle, which starts with an expansion as people spend more or demand for assets increases. As a result, prices increase, known as inflation, and Central Banks – such as the Federal Reserve and the Bank of England – increase their interest rates.
Higher interest rates typically result in fewer people being able to borrow money and the cost of debt repayments going up. That leads to less spending and incomes decreasing – also known as deflation, which commonly causes a recession. And in the event of a recession, Central Banks will begin to lower interest rates to pick the economy up again.
How rising interest rates could impact your investments
Interest rates can affect your investments’ performance, depending on the types of financial assets you have. This includes traditional investments like:
● Bonds: Interest rates can have a significant effect on bond prices. When interest rates are on the rise, they’re likely to cause bond prices to fall, whereas when interest rates fall, they cause bond prices to increase. But higher interest rates can make bonds an attractive investment option compared to riskier opportunities.
● Stocks: Changes in interest rates don’t affect stock markets directly, but any central bank actions are likely to impact stock prices. When interest rates go up, banks are likely to respond by increasing the rates they charge on loans, which means less money is available for consumer spending and company stock values could be affected. So, it can be beneficial and financially stable to have a balanced portfolio of stocks and bonds.
● Savings accounts: Rate changes can also affect investments like certificates of deposits and savings accounts. An interest rate increase could boost these accounts’ annual percentage yield, making them more appealing after interest rates rise.
How interest rises affect ultra-high-net-worth individuals
High-net-worth individuals should look beyond traditional investment options to diversify their portfolios with investments that are less impacted by interest rates and inflation. These alternatives can perform and react differently to traditional investments, which can help you reduce the volatility of your portfolio. Investments to consider include:
Bonds could be advantageous: Rising interest rates make borrowing money harder, but it could make individual bonds more appealing. Individual bond ladders, built by investing in multiple bonds with the same value starting at different times but maturing at regular intervals, can help you establish predictable income while mitigating the risk of fluctuating interest rates.
Real estate investments: Putting your money into real estate can boost your passive income and establish a steady cash flow. Real estate value is likely to appreciate value over time and offers tax advantages, making it a solid long-term option. In addition to offering higher income than bonds or stocks, real estate is likely to be more stable during financial downturns. However, as a non-liquid investment, you can be locked into properties for several years.
Private equity prospects: Private equity offers a significant opportunity to multiply your money and invest in new and thriving industries. However, it also runs a high risk of losing all your capital, so you need to be careful about how and where you invest.
Minimising the impact of rising interest rates
Rising interest rates and inflation look set to stay, which means high-net-worth individuals need to rethink and diversify their spending portfolios. These individuals could also benefit from accessing hedge fund products that deploy market-neutral strategies, which allows them to profit from markets despite direction. While it’s important to remember that rising interest rates can affect company valuations and the price of corporate borrowing.
Hectocorn Group provides a bespoke finance solution and a curated network of lenders to help you maximise your individual spending needs and broker competitive rates on everything from complex mortgages and asset finances.
Are you looking for new investment opportunities to broaden your portfolio? Get in touch to discover how Hectocorn can help you invest wisely and achieve your financial goals.
*Please note that what we have written is informative and not to be taken as advice. Every individual case is unique and must be discussed prior to a decision being made*