TLDR;
This video explains the interest rate cycle and its impact on the economy and investments. It covers understanding interest rates, their impact on investments, strategies for young investors, common mistakes to avoid, and future trends. The speakers share insights on how to manage investment portfolios during changing interest rate environments, emphasizing diversification and informed decision-making.
- Interest rates are the cost of borrowing money, influenced by the Federal Reserve to manage inflation and employment.
- Rate cuts typically benefit high-growth technology stocks, REITs, and small to mid-cap companies by improving investor sentiment and reducing discount rates.
- Key actions for young investors include gaining equity market exposure, understanding valuation models, and staying invested.
Intro [0:00]
The video introduces the concept of interest rates and their significance in shaping the economy, personal finances, and investments. It aims to provide viewers with a comprehensive understanding of the interest rate cycle, moving beyond the immediate reactions to rate changes and focusing on the underlying stories these changes tell. Hazel from the Joyful Investors is joined by James, a market strategist, and Anu, a fintech student and retail investor, to discuss the complexities of interest rates and their impact on investment portfolios.
Understanding Interest Rates [1:41]
James explains that interest rates are the cost of borrowing money. When you borrow from a bank, you pay interest; when you save, the bank pays you interest. The Federal Reserve changes interest rates to maintain price stability and a healthy labor market. For example, if inflation is high, the Fed increases interest rates to discourage spending. Conversely, if the labor market is weak, the Fed lowers interest rates to encourage business spending and hiring, boosting economic growth.
Impact of Interest Rate Changes [3:13]
Anu shares her experience of how interest rate news affects her investment portfolio, noting the positive impact of recent rate drops on the market. A poll reveals that 53% of viewers feel interest rate changes affect their investments, while 19% feel the impact through loans and mortgages. James suggests that the 16% who feel no impact may be underestimating the effects or have fixed-rate loans, and the 13% who are unsure are missing the connection between interest rates and the stock market.
Investment Strategies [4:57]
In a draft pick game scenario where rates are expected to continue to fall, Anu chooses tech stocks due to the potential for increased present value of future prices and company expansion. James, however, opts for REITs, considering them the largest beneficiaries of rate cuts. He believes good tech companies should perform well regardless of rate cuts and that falling bond yields make bonds less attractive. Hazel also leans towards tech stocks, emphasizing their relevance and growth potential driven by technological advancements like AI. The discussion concludes that a diversified portfolio is essential.
Current Interest Rate Cycle [8:38]
James believes we are in the early stages of a rate cut cycle, with expectations of multiple rate cuts by 2026. He suggests that investors may be underestimating the number of rate cuts due to the disinflationary impact of AI and a weakening US labor market. He recommends taking a long position in the tech stock market, viewing it as an AI boom similar to the dot-com bubble.
Future Rate Hikes and Beneficiaries [13:01]
Anu explains the economic cycle, noting that low rates spur corporate earnings and economic growth, leading to inflation, which then prompts the Federal Reserve to raise interest rates. James identifies banks as beneficiaries during rate hikes due to net interest margin expansion. He also mentions consumer staples, utilities, and bonds as potentially benefiting from rate hikes due to their defensive nature and higher yields.
Impact on Investment Portfolios [15:03]
Anu emphasizes the importance of diversifying portfolios and adjusting resources based on interest rate news. During potential rate hikes, she suggests reducing resources in certain areas and investing in T-bills and bonds, which would provide higher yields.
Three Key Actions for Young Investors [15:52]
James advises young investors to recognize that the Federal Reserve cuts interest rates to prevent a recession. He suggests gaining enough exposure in the equity market, learning to buy high and sell even higher by justifying higher fair values through valuation models, and staying invested at all times, as time in the market is more important than timing the market.
Common Investment Mistakes to Avoid [18:03]
Anu notes that a common mistake is being scared by news and leaving money in the bank, which doesn't hedge against inflation. James warns against catching the falling knife, or buying losers, and taking small profits instead of waiting for significant gains. Hazel points out the mistake of chasing after whatever is hot without understanding the investment, leading to weak hands and potential losses. James adds that the feeling of FOMO can be good if it drives investors to study companies thoroughly and justify higher prices based on fair value.
Q&A [23:30]
Anu asks how retail investors holding US dollars can salvage their situation with potential Fed rate cuts. James suggests that as long as the US economy grows stronger, the currency should remain strong. He advises against investing in countries with depreciating currencies and emphasizes believing in the strength and leadership of companies in the countries you invest in.
Final Thoughts and Advice [26:56]
Anu plans to follow James's advice to buy high and sell higher. James advises not to worry too much about interest rates, as they are just one factor impacting portfolios, and to keep it simple by recognizing that the stock market should benefit from Federal Reserve rate cuts. The speakers encourage viewers to stay informed and understand the implications of rate changes before reacting, to stay ahead of market noises.