As contractors,
you like to see the prices of things fall. Whenever the price
of copper goes down, electrical contractors are able to bid
more effectively. Whenever the price of oil goes down, it
doesn’t cost as much to drive your utility trucks and vans
around from project to project. If you follow economic news,
you know that the U.S. dollar has dropped sharply against
every major world currency. Economist and government officials
are keenly interested in the falling dollar. You probably have
even heard your colleagues and competitors mention it as a
concern. But when the dollar falls is that a good thing? And
what does it mean to you as an individual investor?
You may find that the declining dollar
presents you with both opportunities and challenges. On the
positive side, the falling dollar may lead to increased demand
for U.S. exports, which could help many companies—and boost
their attractiveness to investors. On the other hand, a
continually dropping dollar can cause foreign investors to
keep their money closer to home. To get them back, we may have
to start paying higher interest rates. And higher rates can
hurt stock prices; as it becomes more costly to borrow,
contractors and companies may postpone their expansion plans,
resulting in slower growth and lower profitability.
However, higher rates don’t hit all
market sectors in the same way—so you can’t just assume
that rising rates are bad for equities that you own or are
considering buying.
Seek
diversification and quality
If you try to anticipate, and respond to, the market’s
reaction to a falling dollar and rising interest rates, you
could end up making many unnecessary transactions. One way
that may help is to build an "all-weather" portfolio
by diversifying among a wide range of stocks, along with
bonds, certificates of deposit, government securities and
other investment vehicles like managed money. By spreading
your money around a variety of investments, you can help
reduce the impact of economic forces on your portfolio.
Apart from diversifying your holdings, you
can try to minimize the impact on your portfolio from the
potentially harmful effects of a falling dollar and rising
interest rates by investing in quality. Before you buy a
stock, learn everything you can about the company. Does it
have an experienced management team? Are its products highly
regarded? Has it earned profits in a variety of economic
environments? Buy quality stocks, and hold them for the long
term no matter what happens to interest rates or the dollar.
Construct a
"bond ladder"
Rising interest rates may have a bigger impact
on your fixed-income investments, such as bonds, than on your
stocks. If rates rise substantially, the prices of your
existing bonds will likely drop; no one will pay you full
price for your bonds when they can buy new ones that pay
higher interest rates.
Of course, if you bought your bonds for the
income they provide, and you expect to hold them until they
mature, you may not be concerned if their market value drops.
However, rising interest rates are often accompanied by rising
inflation—which means that your interest payments could lose
purchasing power.
To help protect yourself from the dual
threat of rising rates and rising inflation, consider building
a "ladder" of bonds of varying maturities. When
market interest rates are high, you can reinvest the proceeds
from your maturing short-term bonds; when rates are low, you’ll
still get the higher payments from your longer-term bonds. I
like for my construction clients to benefit from the tax-free
benefits of municipal bonds. They are very interested in them
especially if it was a project that they actually are working
on. Check to make sure you are not subject to alternative
minimum tax.
Take Charge of Your
Investment Strategy
By diversifying your portfolio, investing in
quality and building a bond ladder, you can take charge of
your investment strategy—no matter if the dollar and
interest rates move up, down or sideways.
Jesse Abercrombie, an IEC Dallas member, specializes in helping contractors manage their money. For any questions or comments concerning this article, please contact him at 972-241-8059
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