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US rate hike: what’s in it for you?

Planning to invest or shop in the United States? Consider how the U.S. Federal Reserve’s benchmark rate increase might affect your financial strategies – south of the border or at home in Canada.

Tips on investing

Canada isn’t likely to increase interest rates following the U.S. lead. The two neighbouring economies are moving on different trajectories. While there is the potential for further rate increases in the U.S. during the next while, there’s little indication that Canada will pursue a similar move in the near future. 

Rising interest rates can have a negative effect on the price of bonds and their current low rates have been a cause for concern from investors seeking income. High-yield bond instruments have been more popular in both U.S. and Canadian markets, offering a higher return. However, beware: they are riskier than other fixed-income products.

So, what should you do with your portfolio?   

  • Consider diversifying your mix of bond holdings. Combining shorter term bonds with longer-term bonds will help shield your portfolio from interest rate uncertainties.  
  • Invest in equities to offset market upheavals in the mid- and long-term.  Avoiding an all-bond portfolio approach will help you balance your risks and returns effectively. Sit down with your financial consultant to evaluate an optimal portfolio approach.

Tips on spending and borrowing

If you are in the habit of crossing the border to look for better deals, think twice. While the prices of consumer products in the U.S. may be lower than in Canada, you might end up paying more shopping south of the border if you factor in the exchange rate.  

So, how can you grow your wealth?

  • Consider switching to a variable mortgage rate. A lower interest rate in Canada means a lower borrowing cost. If your mortgage is up for renewal, changing your contract from a fixed to a variable rate would help you pay down your house mortgage faster.  
  • Focus on saving. Keep track of your borrowing and spending to avoid racking up debt. Remember: accumulated debt can be very expensive. Sit down with a wealth professional to find ways to reduce it with more interest saving.

December 21, 2015

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.