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What you need to know after the latest interest rate increase

by , 27 July 2015

Newspapers are full of it. Everyone's got something to say about it. The South African Reserve Bank increased interest rates on 23 July 2015.

But what most people call “breaking news” is really just noise to me.

The media sells newspapers and gets TV viewers thanks to this noise. But the one thing you need to remember is that you shouldn't make ANY investment decisions based on this noise…


Do interest rates affect your investments at all?

Many investors go into a flat spin when interest rates rise. The thinking is, rising interest rates mean shares will perform worse in the coming year, or there might even be a crash around the corner.

Don’t get me wrong, there will certainly be some shares that crash. These will be highly indebted companies that will feel the pinch for every bit interest rates go up.

But, overall, the stock market doesn’t really worry about interest rates.

Dr William Madden (Director of Investment Strategy at Russel Investments) investigated interest rates and their effects on stockmarkets in a study called “When rates rise, do stocks fall?”.

Here’s what he found:

“The 43.75 year period from January 1, 1970, to September 30, 2013 was an extremely volatile rate environment, with the 10-Year Treasury starting at a yield of 7.0%, reaching a high of 16.5% on September 30, 1981, and ending at 2.6%.

In this time, interest rates rose for 18.2 years cumulatively with 25.4 years of interest rate drops.”

Most importantly he found that “in rising rate periods, U.S. equities perform best in times when rates rise more slowly”.

He also says that: “There was no compelling reason to alter one’s portfolio in the face of rate increases or decreases.”

There might be short term deviations to this as fear selling or over optimistic buying in the markets affect share prices. But ,over the long term, it’s a proven fact that interest rates don’t affect the stock market all that much!

Just check these four things and noise won’t affect your investment portfolio again


All that matters for your investment portfolio is that you fill it with good businesses that have long-term growth potential, regardless of noise.

I only buy shares that tick every box of my four-tier PowA! Penny Share Strategy.

It’s this strategy that’ll guide you through the maze of companies out there. Not only does it pick me winners from the losers, but it does this consistently time and time again!

Here’s how it works:

The “P” in PowA! stands for PROFITS! When I evaluate companies, it’s about more than just understanding what they do and how they do it. I want to be sure they’re making money. Not just showing paper profits.

O” is for OPEN COMMUNICATION! I believe in knowing the truth. I’ve seen so many great investors stumble because the truth was hidden from them. That’s why I look deep into all aspects of the company to expose any lies there might be.

W” is that all-important WOW FACTOR! I only tip shares whose innovation stuns me. There’s always a reason a share’s price shoots through the roof. I need to know why it’ll make more money tomorrow than it’s making today. If it’s not doing something special, it’ll never be the type of “ignored” share that leaves other investors dumbstruck when they finally hear about them.

And finally, “A” is for ASSETS! A company that doesn’t have the money to back its ambitions doesn’t mean anything. I always look for companies with strength in their balance sheets. I also like companies that use small amounts of assets to produce huge profits!
Using these four criteria I uncovered a company called Rolfes.

Read my analysis of the company here.
In short Rolfes has consistently grown profits in the past couple of years, it has a great mix of assets with a very strong management team. But most importantly the company has recently undergone a shift that could send its share into the stratosphere.

The compnay has made use of a smart corporate finance strategy to sell some of its smaller constituents and acquire a couple of big businesses at discounts.

This could see Rolfes’ share price rise past R6 in the coming year, no matter what interest rates do…

So next time, when ‘noise’ like an interest rate announcement has you running scared calm down. Look at your portfolio and make sure you’ve got solid long term investments in it. If it does, you’ll be safe and make money in the future.

Here’s to unleashing real value

Francois Joubert

Editor, Red Hot Penny Shares
 


What you need to know after the latest interest rate increase
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