Financial plan

Manage your financial plan when interest rises

The Bangko Sentral ng Pilipinas (BSP) announced on May 19 the Monetary Board’s decision to raise rates by 25 basis points (bp) starting May 20. Some analysts expect the Monetary Board to raise benchmark rates by 75 bps this year to rein in inflation and reduce currency risks after the US Fed (US Federal Reserve) raised benchmark rates.

The question for many ordinary people might be, how will interest rate hikes affect me? Banks and credit institutions use BSP rates to compare their lending and deposit rates. When interest rises, the public will be encouraged to save more to take advantage of it, which will lead to a decrease in the circulating supply of money. When people are encouraged to save, it translates into less demand for goods and services, which lowers prices. Additionally, businesses may borrow and invest less due to higher lending costs and potentially slow hiring.

If you follow your financial plan religiously, of course, interest rate increases can affect the components of your investment portfolio.

Interest rate increases will cause the bond’s coupon rate to rise, causing your existing bond with a lower rate to be worth less. Therefore, it is ideal to avoid buying long-term bonds during this period, which will lead to greater paper loss. If you are investing in bonds, it is recommended that you ladder bonds, ie invest in a series of bonds that mature at regular intervals.

Equities are not directly affected by interest rate increases. However, lower money in circulation will mean lower consumer spending, which will translate into lower earnings for publicly traded companies. With a balance of stocks and bonds, your portfolio will be more stable in this rising interest rate environment.

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In this kind of scenario – unstable prices due to inflation and rising interest rates – staying optimistic and sticking to your financial plan is a superpower. I know this is easier said than done, but here are the things you might want to consider when managing your financial goals.

Stay grounded in your investment decision. And you can do this by recording all your investment decisions. Remember that the biggest challenge in a turbulent market is managing our emotions. Know that despite our best intentions, we can still make mistakes and fail from time to time. Many investors tend to over-trade during a bear market. While others have put most of their assets ‘on hold’ fearing that the market decline will hit them hard. So it is best to keep an investment diary. This will help you identify the pattern of what is going wrong or right with your investment decisions.

Another approach you can take is to automate your investments. This will help you stick to the plan, ensuring that your financial goals, such as securing funding for your children’s college education, will be realized in the future. Of course, you can invest a fixed amount of money depending on what your financial goals require of you. But don’t just invest. Avoid adding more losers and don’t sell winners prematurely. Checking the fundamentals of your investment will help you identify which to add more and which to put on hold.

The current market situation is a perfect opportunity for us to invest in these cheap but valuable long term assets. As Charlie Munger explained, “It’s the wait that helps you as an investor, and a lot of people can’t stand waiting. If you don’t have the delayed gratification gene, you have to work very hard to overcome this.”

In any market situation, especially now that emotions are running high after the election, the best thing to do is often to do nothing if you honestly know you’re not sure what you’re going to do. An investment should not be based on the right timing or finding the exact bottom. The worst thing to do is to panic and sell low. As they usually say during market turmoil, “this too shall pass”.

Christopher Cervantes is a Registered Financial Planner with RFP Philippines. He is the author of the best-selling books Financial Planning for the Fast-changing World and The Seed Money. To learn more about personal financial planning, attend the 96th RFP program in June 2022. [email protected] or SMS to 09176248110.