First of all: Don't panic.
Yes, after a record seven years of near-zero interest rates, the cost of money is finally on its way up. And with all the endless speculation about how you'll be affected by what the Federal Reserve does, it's easy to feel like you should do something in response to what, at least in the media, seems like a pretty big deal. Are your investments safe? Did you miss your window to refinance your mortgage, or to apply for an affordable business loan?
It's a little like rushing out for flashlight batteries during a hurricane warning: You know you have plenty in the drawer, but you're still worried about being caught short. But if you already have a stockpile of good batteries--or in this case, if you have an investment portfolio filled with different types of stocks and bonds--there's no reason to make any sudden moves.
"This shouldn't cause any major repercussions," says Christine Benz, director of personal finance at Morningstar (which shares an owner with Inc.). "We've all been waiting for this for the past five years."
That economic holding pattern means the stock and bond markets long ago "priced in" interest-rate increases--meaning you shouldn't see too many drastic short-term hits to your portfolio in reaction to future Fed moves. After all, it's not so much rate hikes as the element of surprise that really shakes up markets.
"This is going to be a very gradual process by the Fed. I can't see rates skyrocketing," says Warren Cohen, my portfolio manager and the managing partner of Clearfront Advisory, a New York City financial advisory firm.
To best ride the interest-rate tide, your investments should be diversified, with a mix of stocks and bonds. Unless you're a large investor, it's probably best to own bonds through mutual funds, because fund managers can always add higher-rate bonds to the portfolio as rates go up; that will eventually increase the income the fund throws off and reward you for hanging on.
In the short run, though, expect your bond funds to decline in price when rates rise, with the biggest blows falling on funds that bet on long-term Treasuries and municipal bonds. Funds that hold short- and medium-term securities won't be hit as hard. Cohen additionally advises getting rid of junk funds, which invest in bonds with grades of single B-plus and lower. They tend to be loaded with debt from energy companies, which have had a rough go of it lately.
Rising interest rates will also affect stocks, of course, but that fallout is more difficult to predict. It will translate into higher borrowing costs, which could make consumers warier of spending. And if you own any concentrations of particular stocks, now is a good time to reassess. Some industries are especially rate-sensitive; for example, capital-intensive utility companies tend to see their stocks lose value when rates rise.
"High-quality bonds are somewhat mechanistic--when rates go up, their prices fall," Benz says. "Stock prices, by contrast, are influenced by many additional factors," including economic growth and valuations.
Now is also a good time to review your debts. Credit card interest rates will probably go up, so pay down any balances you can. If you're thinking of buying or leasing a car, lock in a low rate now. And consider refinancing any adjustable-rate mortgage into a fixed-rate loan.
But things could be looking up for your business financing needs. While loans will become more expensive, banks may find them less risky and more profitable--so it might become slightly easier to get traditional credit. (There's also a quickly proliferating array of nonbank small-business lenders.)
Finally, take a minute to feel excited. While Fed rate hikes can sound like bad news, they're a vote of confidence in the economy. We've come a long way from the dire unemployment and uncertainty of the financial crisis. There could even be a silver lining in your bank statement: A recent informal Morningstar survey found hope that the Fed's moves will eventually yield better returns for savings accounts. "They were like, 'Bring it on,'" Benz says. "I was frankly a little surprised, but it has been a war on savers."
Seven years after the worst of the financial crisis, the U.S. economy is "pretty strong and growing at a solid pace," Federal Reserve chair Janet Yellen said in November. The UC Berkeley economist had spent more than a decade in government, including stints as the head of President Clinton's Council of Economic Advisers and as the Fed's vice chair, before President Obama nominated her for the central bank's top job in 2013. She is the first woman to run the Fed in its 100-year history.
5.25 Percent -- The Fed's target interest rate the last time it raised rates--10 years ago in June.