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How the Interest Rate affects you more than you realise

The recent increase interest rates by the reserve bank of 25 basis points leaves us with the clear direction of where the cycle is heading (1,5% over 2 years). What we are reminded of by this hike is that asset classes move in cycles and not in straight lines. We had an extended cycle of low interest rates for the longest time until the first hike in 2014. When a cycle is prolonged we lose sight of the fact that it will change direction at some stage.

Interest rates affect the performance of other assets which too move in cycles. Listen to Sam chatting to Paul Roelofse in Weekend Breakfast...

Take shares (equities) as another example. The current record levels of the stock markets leave us thinking they are one directional especially after the longest bull run in our economic history. We could easily be lulled into thinking that the markets can only go up. However, this is clearly not the case.

Take the performance of Satrix 40 which tracks the top 40 shares on the local stock market. The return over the past year is much lower at 4,42% versus a 3 year return of 15,34%

Property too is another asset which has turned after stellar upside performance. The current return forecast on Proptrax which tracks the top property companies listed on the stock exchange is around 5% against highs in the past of 40%.

So let’s understand that asset classes move in cycles and not in straight lines. Interest rates are the catalyst which has an affect on them.

The old adage of past performance does not predict future performance rings true in the investment arena as markets do not follow the path of the rear view mirror. Therefore, be realistic with your expectations on returns into the future.

What goes up must come down.

Read more from Paul on www.investforlife.co.za


This article first appeared on 702 : How the Interest Rate affects you more than you realise


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