The Price of Money Has Changed

For most people, higher interest rates are bad news.

They're making homes more expensive to finance, increasing the cost of borrowing, and adding another layer of pressure to household budgets already feeling the effects of inflation.

But there's another side to this story, particularly if you've spent years accumulating wealth.

The same higher interest rates that make borrowing more expensive may be creating opportunities for your investments.

And those opportunities could change how much investment risk you need to take to accomplish your financial goals.

Everyone Wants Your MOney

When interest rates make headlines, the Federal Reserve usually gets most of the attention. Investors hang on every word from the Fed chairman, hoping to understand where interest rates are headed next.

But the Fed doesn't control the price of all money.

Think about the extraordinary demand for capital across the economy. The federal government borrows to finance its deficits. Businesses borrow to expand. Consumers borrow to purchase homes and cars. Meanwhile, inflation expectations, economic growth and global events influence the rates investors demand to lend their money.

Then there's artificial intelligence.

Technology companies are committing extraordinary sums to building data centers, purchasing chips and securing the electricity needed to power them. Some of that investment is being financed with debt.

And it raises an interesting question: At what interest rate does money become too expensive to continue building the future?

I don't pretend to know the answer. Nor do I believe anyone can confidently predict where interest rates will go next. There are simply too many competing forces at work.

But while everyone is debating what higher interest rates mean for borrowers, what do they mean for you as an investor lending your money?

The Other Side Of Higher Interest Rates

For much of the past 15 years, investors faced a difficult trade-off.

Interest rates were exceptionally low, which meant high-quality bonds and other conservative investments generally offered very little income. If you wanted your portfolio to generate meaningful returns, stocks and other growth-oriented investments often had to do much of the heavy lifting.

That environment influenced how portfolios were constructed and how much investment risk investors were willing to accept.

Today, the opportunity set looks different.

Higher interest rates have made income-producing investments more attractive. High-quality fixed income can potentially contribute more toward your financial objectives than it could when interest rates were near zero.

That's an important development, particularly for people who have already accumulated substantial wealth.

Consider what happens when your portfolio can generate enough dependable income to cover a meaningful portion of your lifestyle expenses. Suddenly, there's less pressure on the growth side of your portfolio to fund those expenses. And when stocks inevitably experience another difficult period, having other sources of income may make it easier to remain patient.

You can give your long-term investments more time to do their job.

Of course, stocks still play an important role. Inflation doesn't disappear simply because interest rates are higher, and most investors will continue to need growth to maintain their purchasing power over time.

How Much Risk Do You Actually Need to Take?

When evaluating investments, we tend to focus on how much money we might make.

What's the yield? What's the expected return? Is this a good time to invest?

But there's another question worth asking: What do you actually need your money to accomplish?

Someone who relies on their investments to support their lifestyle has different objectives than someone primarily focused on building wealth for future generations. The same investment might be attractive to both, but that doesn't necessarily make it appropriate for both.

The same thinking applies to risk.

Investors spend considerable time discussing how much risk they're willing to take. But just because you have the financial capacity and emotional willingness to accept a certain level of risk doesn't necessarily mean you need to take it.

And that’s what makes today’s investment environment worth reconsidering.

The opportunities available today are different from those of five or ten years ago. And how you want your money to serve you, your family, and your goals may have changed, too.

Given today's investment opportunities, how much risk do you actually need to take to accomplish your goals?

The price of money has changed. Perhaps it's time to revisit some of the assumptions behind your portfolio.