BOCA RATON, Fla., Jan. 19, 2016 /PRNewswire/ -- When the Federal Reserve raised the interest rate from zero to 0.25 percent recently, it was the first increase of the rate in nearly 10 years. Although a minimal change, the increase puts the rate on a path to normalization. In 2016, you can expect possibly three incremental hikes of the interest rate. So what does an increasing rate mean for ordinary investors?
Savings accounts are the most conservative investment option, so much so that anyone with a savings account has seen very little earnings at all recently, and nowhere near enough to keep up with inflation. Don't expect 2016 to bring about a significant change to the interest paid in this type of account.
As the interest rate rises, so will the rates banks offer for savings accounts, eventually. If you are considering a savings account, pay attention to the increasing interest rate and shop different banks to see which one pays the highest rate.
The rate increase is a welcome change for anyone purchasing life insurance. An increase of the interest rate should gradually make life insurance more affordable because the cost of running risk-management programs should decrease for life insurance companies. Life insurance is also a beneficial long term financial option that can be as conservative as you need it to be but also much more lucrative in the long term than a savings account.
As the interest rate rises, you should also expect the interest rates you pay banks and lenders for mortgages, credit cards, etc. to rise as well. Some people with poor credit may find it harder to secure a loan. Shopping rates will again be important. But as with all of the changes related to the interest rate, don't expect any changes to happen quickly or at a significant level.
If you have a fixed interest rate, you won't be impacted. But home owners with an adjustable-rate mortgage may see a slight increase in their bills. If you have such a mortgage, you may want to consider refinancing before your rate increases.
The stock market is likely to be impacted by the interest rate hike, but the extent to which it is impacted is unknown. If the Federal Reserve effectively communicates its upcoming increases, there shouldn't be any unpredictable swings in the market as a result of the rate. The real problem lies with all the uncertainty in this world.
In the near future, China and other major world economics might experience problems with lower gross domestic product (GDP) than expected, and when their stock markets begin to fall our stock market could be impacted. The best bet for the future is to bet on the long term success of our economy. 2016 will likely have swings, good and bad, much like in 2015. As you get closer to retirement you need to think about shifting more of your assets into safe money alternatives, such as products where your money isn't at risk of going down due to market fluctuations.
A wise investor evaluates all of their financial options and researches what options make the most sense for them. Usually the best option includes a variety of investments. A diversified portfolio isn't a failsafe against losses, but it can minimize risk while still allowing you to reach your long term financial goals. If you are considering changes to your portfolio, you should consider contacting an expert who has experience evaluating investor needs.
Frank Nemeth is the president of Nemeth Financial Group Inc., based in Boca Raton, Florida.
SOURCE Nemeth Financial Group Inc.