Transcript:

[00:00:00] Matt Halloran: Welcome to another Life Unlimited podcast with your host, Larry Heller. Today we’re gonna talk about interest rates and investments, understanding the ripple effect on your financial plan.

[00:00:09] Matt Halloran: Now, Larry. It’s been in the news, my friend, that, uh, the Feds just did something.

[00:00:14] Larry Heller: That’s right. Some rate changes. What’s up man? On September 17th, the Fed cut interest rates fed fund rate by 50 basis points, hoping to stimulate the economy, hopefully stimulate the economy with a soft landing, which means not sending us into a recession.

[00:00:31] Larry Heller: So, you know, there’s a lot of things that make up interest rates and why they fluctuate inflation, economic growth, unemployment rates. I’m not really gonna go into that, but I’m gonna kind of go back a little bit in history and kind of talk about what I’ve seen and then also what does that mean to you?

[00:00:47] Larry Heller: How can you manage certain things as far as what’s going forward, as far as investments, planning, retirement. So we got a lot of things to, talk about. Let’s start with a little history kind of lesson here. So, um, for those of you, um, who really remember much higher interest rates, double digit interest rates, mortgage interest rates at 13, 14, 15%.

[00:01:13] Larry Heller: Matt, you’re shaking your head so you, yeah, totally. So interest rates kind of, rose from like the 1950s and they kind of peaked in 1980. And then from 1980 to 2020. Interest rates mostly [00:01:30] fell. There were a couple times where the Fed raised rates, but basically we had 20 years of falling interest rates.

[00:01:36] Larry Heller: so there are really times where the whole generation really never had to live with a rising interest rate environment and had to adjust their investment strategy and their retirement strategy. They just saw rates went down. So what does that mean? Basically, from the investment side? From investment side, if you own a.

[00:01:54] Larry Heller: Bond and rates go down, the value of your bond goes up. So you were making money on your bonds, but as they matured, they had to be invested at lower rates. So your next yield was, was going to be lower. So interest rates kept falling, kept falling, and then we know what happened in the pandemic.

[00:02:13] Larry Heller: Well, if you don’t really know or remember what, what were interest rates in 2020 during the pandemic, Matt, I. Dude, they were like close to zero Weren. Exactly. They’re close to zero. So now what do you do when they’re close to zero? So then all of a sudden we started to see rising interest rates and we, it went up fast than most people predicted.

[00:02:33] Larry Heller: A couple of banks out there made some bad mistakes with that and kind of went business, but they rent. We went back up and then finally, now 2024, we had a cut. What is gonna happen going forward? What are the next 20 years gonna be? Are we going to be more cuts, possibly looks that way, but are we gonna be in a rising interest rate [00:03:00] environment?

[00:03:00] Larry Heller: Who knows what that’s going to be? And that’s a big challenge for the Fed to be able to manage the interest rates and not put us in a recession. Uh, we haven’t had really a recession. I’m not gonna count the pandemic, but there technically, there have been a couple of. Orders. So recession is really two quarters of negative.

[00:03:20] Larry Heller: GDP. So, but basically we haven’t had a real recession to 2007, 2009. So can the Fed manage this and properly lower rates? Some people think they’re gonna lower rates, but then they’re gonna have to quickly raise rates again to counteract inflation. So it’s gonna be a real challenge going forward on what to do, but.

[00:03:43] Larry Heller: Are we in now? Kind of a new 20 year timeframe when rates are gonna go back up. We’ll see, we’ll see what happens.

[00:03:50] Matt Halloran: I I wanna digress just for a moment here. ’cause you just opened a can of worms. I don’t know if you were prepared to open, uh, which is, but interest rates aren’t the only thing that really, are tied to inflation, are they?

[00:04:00] Larry Heller: No, you know, there, there are other things that are tied to inflation, but, so if rates, they’re not gonna lower rates to stimulate the economy because if the economy is too stimulated, then inflation can kind of get outta control. So, we want to make sure that there it. raising rates would curb inflation.

[00:04:18] Larry Heller: So, there’s a lot of factors that go into this, but controlling the interest rate helps the control inflation.

[00:04:23] Matt Halloran: Alright, well let’s continue with the whole control thing because, because when interest rates change, your financial plan can change. What, what do we do about [00:04:30] this?

[00:04:30] Larry Heller: Right? So let’s start with the first thing.

[00:04:31] Larry Heller: Borrowing costs, mortgage rates. So I know people think, oh, mortgage rates are so high in this six range, but again, as I talked about earlier, there’s been plenty of times in streets are in the double digit. So. What do you do now? Do you look as possibly mortgage rates get lower? If you’re with a higher rate that you did a few years ago, do you lower your interest?

[00:04:54] Larry Heller: Interest rate right now, refinance and lower the interest rates. will lower rates even spur the housing market even further? People, the housing market. But it has been driven probably be, be some, because the need, there’s been a, not a great need for, um, for ho not a great, um, market. Not a, uh, what’s the word I’m looking for, Matt?

[00:05:15] Larry Heller: limited supply is what I, I’m looking for there. There you go. Yeah. In home. So, we’ll, interest rates now even. F tighten that market and set housing even further. So one of the things, if you, we are planning on buying a house or selling a house, you have certain decisions to make. So these kind of rates have an impact on really where you’re gonna live and the type of financing you’re gonna do along those lines.

[00:05:39] Larry Heller: So that’s one thing to, and one thing to consider. Um, the other is your, your retirement. Planning and some of the adjustments that you should make based upon the expected returns. Um, you know, we’ve seen people that have come in and they, they live living off their interest back in the eighties because they could interest rates.

[00:05:59] Larry Heller: Were high [00:06:00] enough that, yeah, if you can get 15% on a. cd, you’re making great, great money more than what typically you’d make on the stock market, but with rates it’s zero and inflation. even if they wasn’t that much higher than that, you’re losing money on keeping money in CDs and cd. So knowing how to really adjust your retirement, what your withdrawal rates are, what your allocation, we’ll go into a lot of those things, but how does that affect your retirement?

[00:06:26] Larry Heller: Your retirement plan. and there are also some people without going into it, that their pensions, they still have a traditional pension, could be tied into what the current interest rates are at the time that you’re doing, uh, making a retirement. So that has an impact as well. and then savings and investments.

[00:06:41] Larry Heller: You know, obviously the rising and the falling of, of savings of interest rates, impact savings and CDs. And we, we’ve been in an inverted yield curve for a, for a while starting to flatten out a little bit where longer rates are higher than shorter rates. So a lot of people didn’t want to lock into some higher rates because they were making more money on the shorter rates.

[00:07:04] Larry Heller: But now that shorter rates have. Kind of starting to come down. as your CDs or treasuries are maturing, you’re saying, Hmm, maybe I should have locked in a little bit more. So, I mean, kind of when we do this, we we’re looking at both short term, long term, not trying to. Guess which way is gonna go, but have a mix of both and we’ll talk to a little bit about how we talk about bonds in a, in a little bit.

[00:07:28] Larry Heller: And then [00:07:30] possibly adjusting your, your asset allocation along those lines and kind of get into, you know, cash and, and when we look at our. Reservoir strategy or our retirement strategy, we wanna keep two to three years in liquid assets. And it’s great when you were making five, 6% on your liquid assets, but if those rates drop down, maybe you want to keep a little bit less in emergencies than maybe you do when you’re, when the rates are a little bit higher.

[00:07:58] Larry Heller: Or should we have locked into three years? So, and then our rate’s gonna fall much lower again. There’s already been talk. The fed’s gonna lower rates and other 50 basis points down the road. So it’s really important to this because a couple interest rates, uh, changes in those rates can affect your portfolio, the amount of money you earn, and how you should set up your portfolio.

[00:08:20] Matt Halloran: Well, let’s break down the portfolio specifically. so when, when it comes to asset classes, so you just talked about the overall components of a financial plan, but let’s talk about the asset classes specifically and how interest rates can change what you have to do within each asset class.

[00:08:35] Larry Heller: Right. So I just started talking about the cash and how about, you know, cash was, was great and even for.

[00:08:41] Larry Heller: Sending some money on the sidelines and you’re, you’re making 5% on your cash is great. But now that started to, you know, gonna start to go down. You’ve seen one year treasuries, two year treasuries decrease. You’re gonna start to see money markets start to go down, CDs are gonna go down. but then there’s also bonds.

[00:08:58] Larry Heller: So the bonds been able [00:09:00] to get a little bit higher. Rates of re. Turn with obviously not the risk of the stock market, but now as rates go down, well as I talked about, the value of your bonds are gonna go up, but as these bonds mature, we you going to invest them and what are some of the strategies that are, that are in place and some of the strategies that we use, whether it’s laddering, bonds.

[00:09:20] Larry Heller: Over the course of, uh, a long period of time whether it’s a, a, a bell type shape where you have some in shorter and some in longer. So these strategies in determining what your duration is, what you think the duration is in a. Falling interest rate environment, so you can tweak kind of your bond portfolio where you when rates are going down, and then tweak it again when rates are going, rates are going up.

[00:09:42] Larry Heller: So important to look at your bond allocation, your bond duration, your bond maturity, along those lines. and then the, you know, stock. So as the Fed cuts rates and rates become lower, more people now are, oh, I, I’ll invest in the stock market. So now there’s a chance that the stock market will rally even more in this.

[00:10:03] Larry Heller: And we’ve seen that already with the first 50 basis point cut that it, even though we’ve had a huge run and a lot of people think maybe we we’re. You know, we’re at the top, but who knows? But now we’ve gotten even more mo momentum by this change in interest rates. And then with inequities, there’s large cap versus small cap.

[00:10:22] Larry Heller: So when rates go down, that usually helps small cap stocks because those are the companies that need to borrow [00:10:30] money to run their business versus these mega growth, which. Either can borrow at a lot lower rates or don’t need to borrow. So now will small cap now kind of outperform going forward? Or is there a switch from growth to value stock?

[00:10:44] Larry Heller: So all those kind of impacts go into the strategies when there’s a change in the interest rates, and then real estate. Now, does that have an impact like we talked about before, a lowering borrow cost, both on commercial side and on personal side? Well, that. Impact, impact your real estate and that allocation.

[00:11:01] Larry Heller: So those are the main ones and there’s so many different, iterations and depends upon your scenario, your time arrives and your risk tolerance and what makes sense for you. And that’s how kind of we put together. Our strategies and our portfolios for you. But there’s one more asset, al one more asset class that we’ve been using a lot.

[00:11:19] Larry Heller: And it’s also affected by interest rates and that’s alternative investments, private credit and private equity. private equity companies, you know, they’re buying and selling companies and when they try to do this, a lot of times they’re borrowing money. To buy certain companies. So when rates spiked back up a little bit, you saw some of the private equity deals kind of dry up a little bit.

[00:11:41] Larry Heller: Now with rates going down, you probably see some more activity and some better private equity and some better returns going forward on private equity over the last couple of years. and private credit may get affected too, even though right now private credit interest rates are pretty high, but they may come down a little bit as well.

[00:11:59] Larry Heller: So. [00:12:00] You know, all these different asset classes all kind of have an impact when interest rates change. So you, you know, having and knowing what this is can have a great addition to how you set up your investments.

[00:12:12] Matt Halloran: I. Well, thank you for breaking each of those down too, and, and how interest rates are going to, uh, potentially affect all of those.

[00:12:19] Matt Halloran: Uh, I I think there’s some things there that I don’t think people would’ve realized that, you know, a 50 basis point cut by the Fed would’ve impacted everything else as much as it has. Alright. So you as the financial planner, you know, as the, as the, the, the wise sage at Heller Wealth Management. You, you have to have some sort of a strategy here.

[00:12:39] Matt Halloran: So how do you, uh, with all of the clients that you and your team service, what sort of strategies are you using to help really be adaptive or even reactive or proactive when it comes to interest rate changes?

[00:12:53] Larry Heller: I. So, and you have to be careful not to try to time interest rates because a couple years ago people were already saying the fed’s gonna cut, the fed’s gonna cut the fed’s.

[00:13:02] Larry Heller: Well, it probably took them two years before they actually cut that. So you’re not going to just try to. You know, put all your chips in one particular area. So you still wanna make sure that you have a diversified portfolio, you’ll have a strategy for what if scenarios along those lines, and then maybe tweak it based upon what’s going on.

[00:13:22] Larry Heller: And that’s kind of what kind of what we do. So we still have, let’s say on the bond side, A, we still gonna have bonds in the [00:13:30] portfolio, but maybe we adjust the duration up or down when, right when rates are. Falling, uh, we’ve adjusted the duration a little bit higher. When they’re going higher. You want to adjust the duration a little bit lower again.

[00:13:44] Larry Heller: All within your risk tolerance, all within your time horizon. But those are some of the things that we did. And we talked about the equities, how that can change. So are we rebalancing outta some of the sectors into some other sectors? And we do that on a month, on a quarterly basis, looking at that. So now do we tweak some of that?

[00:14:03] Larry Heller: Based upon what we’re seeing along those lines. the reserve, how much do you have in your cash portfolio? How do you, you know, how do you do that? So those are all factors that come and come in play. And then we have certain kind of one-off, one-off strategy. We have a client actually call us this week and they are, um, putting a a, a bid on a second home and.

[00:14:25] Larry Heller: They actually have a second home, but they wanna put this bid, buy this before they sell the other one. So then what are we gonna use for the money to finance this? Well, with a little bit lower interest rates, maybe we borrow against their portfolio instead of selling some things with a capital gain rate.

[00:14:43] Larry Heller: So all those come into into play. So anytime there’s a change in there, it affects everything that you’re doing for your clients.

[00:14:49] Matt Halloran: That’s a lot to keep track. Okay. So, so I’m, I’m gonna ask you a, an off script question here very quickly. So, so when, uh, the feds do change interest rates, how are [00:15:00] you communicating all of these different things to your existing clients so that you’re not just flooded with phone calls?

[00:15:06] Larry Heller: Yeah, so, for most of our clients, as to all the clients, we’ve kind of educated them not only in interest rates change, but. Just, you know, the stock market and possibly big term corrections and also big upturns to explain to them that we are not trying make drastic changes based upon a short term effect.

[00:15:25] Larry Heller: So when the market went down, it was a. About a month ago, we went down a thousand points. People were asking, oh, you must have been so busy with so many calls. And believe it or not, we didn’t get any phone calls. We sent out an email explaining if they want to talk to us. I think we got one email, one email back.

[00:15:40] Larry Heller: So we are doing the education upfront and the communication upfront and an ongoing basis. So when these events happen, it’s really, oh. Larry and his firm, we’ve already discussed that this could be happening, and I know they’re gonna be doing this, or looking at this or looking at this. And when we’re sending out, Hey, by the way, fed rates changed, they’re already anticipated.

[00:16:03] Larry Heller: They already know that we are already thinking about some of these changes that we’re gonna make in their portfolios.

[00:16:09] Matt Halloran: And before I ask you the last question here, I just wanna remind the audience that, that what Larry is talking about here isn’t the norm within financial services, which if you know somebody who probably is panicking or excited or having strong emotional responses, uh, to what’s going on, uh, sharing this podcast with them, sharing the communication that you get as a Heller Wealth Management [00:16:30] client is really, really important because not a lot of advisors do this level of education.

[00:16:34] Matt Halloran: All right. So here’s the last question, man, and I think this one’s a mouthful. I’m interested to see where you go with this, which is how do you balance this level of risk and return with this kind of ever changing interest rate environment?

[00:16:49] Larry Heller: I. I don’t sleep, man. That’s way What do? So, so, yeah. I mean, that’s what we do.

[00:16:56] Larry Heller: I mean, that’s what we’re made of. I, I, you know, I’ve got 30 years of, I’ve seen the ups and I’ve seen the downs. My staff has to, so we’ve been through this before. So, so we have that experience to kind of do that, to manage. Expectations to manage what’s going on, to not get caught up in a dramatic change based upon a short term movement.

[00:17:19] Larry Heller: Whether it’s interest rate, a stock market rally, a stock market major correction, to be prepared for everything and to manage what the clients are doing. Do they need money? Are they gonna look to buy a house in a year or two years? Are they gonna retire in a year? Or you know, they, they have a big wedding that they wanna do versus, while this money is really for long term and part of it’s gotta be, provide me the income that I need and not just the income I need.

[00:17:46] Larry Heller: ’cause we told interest rates can change, but how can I get the net rate of return after taxes to meet my retirement needs? So yes. So we have a great staff. We work with a select group of clients to make sure that [00:18:00] we stay on top of this, and we’re meeting both of their planning needs and their investment needs.

[00:18:04] Larry Heller: That’s why the name of the firm is Wealth Management.

[00:18:06] Matt Halloran: Yeah. Alright, Larry, if somebody wants to know more about who you are, what you do, if they haven’t subscribed yet to the show, please make sure that you do. But where should they go?

[00:18:13] Larry Heller: Sure, go right onto our website. Heller wealth management.com and you can click and schedule a 20 minute call myself or one of our certified financial planners or feel free to call the office at (631) 248-3600.

[00:18:27] Larry Heller: Alright.

[00:18:27] Matt Halloran: For all of you that are listening, there is so much going on in the world today that you need to have a professional who truly understands how what’s going on in the world is going to affect you and your long-term investments and what retirement is gonna look like. If your financial services professional isn’t educating you, and if your financial services professional isn’t talking about the things that we just shared today about interest rates and investments, well they should be.

[00:18:52] Matt Halloran: And you should go ahead and reach out to Heller Wealth Management, to find out how they can truly help you. So for Larry, this is Matt Halloran, and we’ll see you on the other side of the mic very soon.