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Tactical advice for when rates go up | Ask An Advisor
With interest rates going up again, what are you advising clients now, that you didn’t advise 24 months ago?
Ask An Advisor
Hello and welcome back to Ask An Advisor.
This week we have a timely question, with interest rates going up again last week.
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The week’s question
“With interest rates going up again, what are you advising clients now, that you didn’t advise 24 months ago?”
- Stephen, VIC
This week’s advice
This week’s advisor is Jacob McCudden, from Back to Back Financial Planners. Here’s what he said in response to Stephen’s question:
Great question.
The first thing we need to understand is there is a difference between tactical and strategic advice.
Strategic advice is long-term, so it’s not bothered by short-term changes in economic cycles (which this is an example of).
Tactical on the other hand, is making short-term “pivots” in the overall strategic direction to take advantage of opportunities that exist temporarily. In this case, making adjustments to a plan in light of a short-term economic factor like this is very much a tactical decision.
An example on this would be tactical debt reduction strategies (i.e. deleveraging) in light of the extremely fast pace interest rate rises. In other words, advising clients to reduce their overall debt exposure in light of the rapid rate rises (e.g. better to pay back debt right now rather than keep investing as we need to manage what our ongoing obligations will be with the higher interest rates that are likely to persist for a while, however, we know over the long-term (10+ years).
Strategically, growth assets will also increase in nominal returns once the interest rate environment settles – which it will.
In contrast, when rates were at historically unprecedented levels during COVID-19, the tactical advice would be the complete opposite, don’t deleverage, potentially actually re-leverage, as the cost of borrowing money was essentially zero. Obviously, that’s not the case in the current economic climate.
But of course, “good” advice is advice that’s been tailored to your unique position, so what advice we give a client depends more on them than on us (e.g. even two different clients with seemingly similar positions “on paper”, could walk away with completely different advice from us as they will likely have quite different goals/objectives, life/financial experiences, risk appetites/tolerances, and values and principles).
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About Jacob McCudden
Jacob is an experienced Certified Financial Planner® who holds a Bachelor of Business (majoring in Financial Planning and minoring in Accounting) from RMIT University and entered the profession in 2017. “Whilst many people may think financial planning is all about managing money, it’s really much more than that. It’s about uncovering your client’s hopes, dreams, and unspoken fears, and providing them with valuable guidance, counsel, and support when they need it most.” All opinions are the opinions of the advisor, and any advice is general. |
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