Half of investors are planning to take out more loans in anticipation that interest rates will rise, according to a new survey.
After years of grappling with short-term rates near zero, investors are already preparing for the Fed to announce a rate hike in the near future, according to a Wells Fargo/Gallup Survey.
The survey results illustrate not only how the rate hike will affect investment decisions in the future, but how the current state of anticipation is affecting the behaviors of investors, asset managers and financial advisers today.
According to the survey, more than half (58%) of investors have taken advantage of the six-year streak of low interest rates by taking out loans, with half of investors planning to take out more loans in anticipation that interest rates will rise.
“On the debt side, investors are still refinancing, still trying to take advantage of the low rates to secure a loan or reduce their debt and on the investment side they are looking to produce a portfolio that can weather a rising-rate environment and benefit from it,” said Robert Vorlop, managing director and head of products and advice at Wells Fargo Advisors. “Advisers are working with investors on preparing a client's portfolio for rising rates, and that's what this survey is saying as well.”
Many investors are clearly aware of the impact that a rate hike would have, with almost half claiming that they would make significant adjustments to their investment strategy if interest rates were to rise.
That task is not always easy. Rising interest rates may cause investors with allocations in cash and cash alternatives such as money market funds to see returns for risk-free assets slowly move higher. However, with the possibility of longer-term interest rates increasing, investors may want to exercise caution handling securities with long-term maturities.
“From an adviser perspective, it's figuring out how to take advantage of lower rates on the debt side but also managing a portfolio for the probability that rates will be rising very quickly,” Mr. Vorlop said.
Two-thirds of investors have been consciously reducing their debt, according to the survey, and more than half said that it is important for them to retire debt-free. The vast majority, however, see debt as necessary and even acceptable if it not used frequently.
“On the debt side you have two things happening,” Mr. Vorlop said. “Investors are actively looking to take advantage of low interest rates, buying a new car, buying a new home and things like that, and at the same time, 90% of them say they are driving to a low or no-debt environment in their future. Long term, they are saying, 'I don't want to have much if any debt, and having a very low debt is very important to me.'”
Mr. Vorlop referred to this kind of behavior as pursuing “a short-term opportunity and [following] a long-term strategy.”
The findings also illustrate the divide between current and pre-retirees in terms of debt management. Only one-quarter of non-retirees expect Social Security benefits to be a major income source, versus 42% of current retirees who describe Social Security benefits as a major source of their income.
“Pre-retirees are looking at a kind of combination of accumulation and also subsequent income,” Mr. Vorlop said. “They feel more stress and more anxiety about getting to an investment portfolio and managing their debt where it generates a sizable amount of their retirement income.”
