They protect us from the cold or keep us from brake lining suppliers over-heating. Take advantage of economic cycles. The proportion of each in a portfolio will greatly affect the overall volatility. The last several years, interest rates have been at historic lows. By putting money in or taking money out the Federal Reserve is able to artificially control the supply demand balance. The companies that make those essentials aren’t going to see the big change in demand for their product that a construction company might. That “extra” money comes from inter-bank loans and is referred to as the Fed Funds Market. They determine whether it is a good time to own bonds, and what type of bonds to own, as well. Doing so properly will allow you to increase your return while reducing your risk. Banks lend more money then they receive in deposits. Unfortunately, many don’t understand the changing of economic seasons and therefore fail to adjust the clothing used in their portfolio. The construction industry will perform best during periods of low interest rates because low interest rates are designed to spur growth. Just as supply and demand causes the price of a stock to go up or down, so is with the interest rate charged in the Fed Funds market.
Clothes are a tool that is used to help regulate our body temperature. You don’t want to lock in low rates for 30 years.
Different industries do well in different parts of the economic cycle. As many saw in 1997-2000 and 2000-2002, the investment clothes that work in one season are close to useless in another. It stands to reason that if a bank pays more on what it borrows, it will have to earn more on what it lends.
. Understanding how interest rates affect the business cycle will help you know how to structure your portfolio to achieve growth while minimizing risk. I doubt any of us would wear a bikini to go ice fishing in the middle of a Minnesota winter. The Federal Reserve uses the rate it charges on over night loans to banks (the Fed Funds rate) as an accelerator or brake on the economy. If you have to pay a higher interest rate on a mortgage your monthly payment is going to be higher. There are also times (called peaks and troughs) that are like spring and fall, times of transition from one major cycle to the other. I recommend having a portfolio of high-quality non-cyclical companies.The effect interest rates have on the performance of our economy cannot be overstated. Their proper use determines our comfort from one season to the next. Don’t let them take advantage of you. We don’t want our body temperature to wildly fluctuate up and down.