Personal Finance Strategies: Dropping interest rates

By using mutual funds as building blocks, it is easy to build and easy to manage a well-diversified investment portfolio.

benchmark graph 88298 (photo credit: Bloomberg)
benchmark graph 88298
(photo credit: Bloomberg)
As a guest on the IBA English news this week, I was asked to comment on the effects the recent interest-rate drops will have on the man in the street. I feel this is an important issue, and will address it here. As has been reported in the media, the shekel interest-rate has followed the dollar interest-rate downward, and is currently at an historic low level. This interest-rate drop is a double-edged sword - good for some, and not for others. Those people who have borrowed money from banks are happy about the fluctuating interest rates because their monthly repayments have dropped. Those who have money in the bank, and are living off the interest, will find that their income has dropped; they will be struggling to make ends meet. Many savers, especially elderly people, are attracted to the relative security a fixed-income deposit offers. The cost for this, however, is being felt now, as their income is dropping. The question I have often been asked is, "What alternative is there?" My answer is simple: One needs to assume a greater investment risk, but in a calculated manner. That means exposing oneself to a diversity of investments that give a higher return than money in the bank, but not necessarily exposing oneself to an overall greater risk. This is achieved by diversifying an investment portfolio into different segments that are not affected by the performance of another segment. Examples of investment strategies that are different than interest deposits include stocks, bonds, real estate, hedge funds and commodities such as energy or gold. At first glance, an investor who is unfamiliar with such strategies may be scared off, but it is possible to access these investments by using the skills of professionals in the specific area. The easiest way to do this is via a mutual fund. By using mutual funds as building blocks, it is easy to build and easy to manage a well-diversified investment portfolio. One area of opportunity is bonds. They are basically IOUs issued by governments or companies that carry a fixed repayment rate. As interest rates in the market drop, the value of these bonds rise. So in an environment of falling interest rates, a bond investment can be very lucrative. I would caution, however, not to buy only one bond, as there is always the risk that a bond issuer could default. In addition, one has to pay attention when interest rates begin to rise again; the bond's value will fall. My last comment is the most important. I suggest that everyone needs to set long-term goals, such as " retire in comfort" or "educate the children," and not focus on the short-term results. Over a long-term period we are inevitably going to encounter periods of turbulence. But that should not mean the eventual goal will not be reached. If we set such goals, and stick to the strategies, they likely will be achieved. Philip Braude is an accountant, personal financial planner and licensed investment marketer. He is CEO of Anglo Capital Limited.