The Federal Reserve Board made a small, quarter percent cut to the interest rate this week but signaled more cuts may be coming. Rate cuts can be good for taking on loans, but a mixed bag for investments.
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Christopher Stroup, a CFP and owner of Silicon Beach Financial, explained what this and future cuts might mean for your investments — time to dig in deeper or hold steady?
What Lower Rates Mean
Lower rates usually mean weaker returns on savings accounts and certificates of deposit (CDs), but stronger stock market performance as borrowing gets cheaper, Stroup explained. Bond values can also rise when yields fall. “For everyday investors, the shift often feels like less income from cash but more growth opportunities in equities.”
Stocks, especially growth and tech, often benefit from cheaper borrowing, as well, he noted. Real estate can also gain traction. On the other hand, cash-like investments such as CDs and savings accounts become less attractive, and newly issued bonds may offer lower yields than existing ones.
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Choose Consistency Over Waiting
Almost all financial advisors, Stroup included, will tell you that timing the market is nearly impossible, and consistent investing usually beats waiting. “[D]ollar-cost averaging spreads risk and keeps your money compounding,” Stroup said. In other words, by investing regularly you stay disciplined, avoid emotional decisions and position yourself to benefit whether markets rise or pull back.
Don’t Let a Headline Drive Investing
While it’s natural to read news of a rate cut and think it means you should make an immediate move, Stroup said, “The most common misstep is trying to trade on headlines by buying or selling too fast. Short-term moves rarely align with long-term goals.”
These moves can lead to overreactions which “can leave investors underexposed to growth opportunities or locked into lower-yielding assets unnecessarily.”
Expect Lower Yield on Savings
There’s one area where your money will immediately decline after a rate cut — and that’s in any high-yield type of savings or money market accounts. Your “safe money” earns less interest, he said.
While these accounts remain useful for emergency funds, they’re less effective for long-term growth anyway, so it could be smart to “balance safety with higher-return opportunities elsewhere,” Stroup said.
No matter what, a balanced approach works best. “Keep enough in cash or short-term bonds for stability but consider dividend-paying stocks or high-quality bonds for income,” he said. The key is preserving principal while ensuring your portfolio generates steady, sustainable returns.
Pay Down Some Debt
Lower rates typically mean cheaper mortgages and auto loans, but credit card rates don’t always fall as much, so don’t hold onto debt just because you think it will cost you less.
“For investors, reduced borrowing costs can fuel corporate growth, which supports stock performance,” Stroup said, another reminder that debt and investment strategies are connected.
Prepare For an Economic Slowdown
Don’t forget that rate cuts often signal slowing growth, Stroup noted. However, don’t panic, diversify. Also, shore up emergency savings and review your risk tolerance. “A well-built portfolio can weather economic soft spots while still capturing long-term opportunities.”
A rate cut can also stoke inflation by boosting demand, an unwelcome event in a time when every day costs are already high. So, “investors should factor this into planning, focusing on assets like equities and real estate that historically outpace inflation over time.”
Younger Investors Should Jump In
Younger investors benefit from time, not timing, Stroup noted. While rate cuts can lift stocks, even if markets dip, decades of compounding will smooth out any volatility. “Regular investing now creates the foundation for long-term wealth growth.”
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This article originally appeared on GOBankingRates.com: The Fed’s Latest Rate Cut — Should You Invest More or Wait It Out?
