Pay down debts. The average balance-carrying household owes $7,564 on its credit cards and will be paying about $10 more a month in credit-card interest than it did last year, reports Robert McKinley of CardTrak.com. Add that to the $26,627 in outstanding home-equity lines (an additional $138 a year), a new car loan and a mortgage, and borrowers will feel the pinch. Maybe all that debt made sense during the New Economy boom, when rates were rock bottom and stocks were making everyone rich. Now the smartest tack is to pay down debts, starting with those high-rate credit cards. Margin loans, always a risk, make even less sense when rates are rising and stocks are roiling; it might be smarter to do the exact opposite by selling investments to pay off debts. People who really need cash should try their life-insurance policies first or then borrow against their 401(k) plans. At least they’ll be paying higher interest to themselves, as payments they make go directly into their own plans.
Stall. Anyone who didn’t lock in a 7 percent mortgage last year is feeling pangs of regret. Thirty-year loans are pushing 9 percent and could go higher. And with short-term rates rising even faster, adjustable-rate mortgages don’t offer much protection. The solution, says Keith Gumbinger of HSH Associates, is a so-called 5/1 hybrid. Those loans lock in a rate for five years. Currently that’s 8.19 percent. Then they become one-year adjustables, but by then you may have replaced it with a lower rate.
Shockproof stocks. Rising rates and the recession that could follow are bad for all stocks, but some are more resilient than others. The consumer necessities, toothpaste and toilet-paper stocks, tend to hold up because people buy them even in hard times. And it would be the wrong time to sell all those tech stocks you bought for long-term growth; most of those companies are not particularly dependent on interest rates. Since Greenspan is expected to win his holy war, it would be a mistake to load up on inflation plays like pork bellies and gold bars. The most interest-rate-sensitive stocks, like banks and utilities, have already been hit by the Fed’s moves, so if you didn’t sell them months ago, don’t bother now. Hit hardest might be companies that depend on consumer financing, like automakers and retailers.
Back to boring. Instead of trying to Fed-proof their portfolios with stocks, investors may find ballast in nonstock investments. Just remember that during times of rising rates, it pays to stay short term. Three great but dull portfolio stabilizers that look better with every uptick in rates: the Treasury’s inflation-indexed I-bonds, which are marked to consumer prices, so-called stable-value investments and good old money-market funds. Investors who keep a piece of their portfolios in one of these three wallflowers will capture rate hikes, balance their stocks’ volatility and sleep a little better, too.
Investors can buy the Treasury’s I-bonds online at savingsbonds.gov for as little as $50. They’re paying 7.49 percent in interest that’s exempt from state and local income taxes, and the returns are guaranteed to rise if consumer prices do. You have to hold them for five years to avoid interest penalties, but can get around that by buying certain mutual funds, such as the forthcoming Vanguard Inflation Protected Securities Fund.
The stable-value investments are fixed-rate guaranteed contracts from insurance companies and banks sold through 401(k) plans. New five-year contracts are paying 8 percent. Finally, that money fund isn’t a bad investment choice right now either. With short-term rates currently besting returns on long-term bonds, nobody is paying investors to tie their money up for long. After all, in six weeks Greenspan’s posse rides again.
