AWM Insights Financial and Investment News

The Federal Reserve just raised interest rates for the first time in years, and the headline matters well beyond Wall Street. In this episode of AWM Insights, Justin Dyer and Mena Hanna explain why the Fed hit the brakes, what a quarter-point hike means for anyone borrowing to buy a home, and why the Fed can't fix every driver of inflation, from oil prices to conflict overseas. Then they turn to what matters most for investors: how rate moves hit portfolios. Using a boat, a water level and an anchor, they show why savers can come out ahead when rates rise, why one-size-fits-all bond allocations can leave families exposed, and how shorter-term, liability-matched fixed income keeps a 100-year plan steady whether rates rise or fall.

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Chapters
00:00 Preview: The speed limit, the water level and the anchor.
00:45 Why Interest Rates Matter: Why a topic that sounds dry affects everyone, and the Fed's first hike in years.
02:44 Why The Fed Raised Rates: Inflation, a quarter-point hike and lowering the economy's speed limit.
04:20 What Higher Rates Mean For You: Pricier borrowing, bigger mortgage payments and a more constrained buying pool.
05:38 Not A Perfect Machine: Oil prices, the Middle East and the limits of what the Fed can control.
07:05 Rates As The Water Level: Why rate moves barely change our decision-making, and why savers can come out ahead.
08:04 Too Much Interest Rate Exposure: How one-size-fits-all portfolios like 60/40 get hurt when rates rise, and why we favor shorter-term fixed income.
11:10 Fixed Income As The Anchor: Why the anchor has to be sized to the boat.
13:02 Don't Predict The Water Level: Forecasting rates versus immunizing portfolios.
14:35 Wrap-Up: Rates, the global economy and protecting the 1Hundred Year Family plan.

Creators and Guests

Host
Justin Dyer
Chief Investment Officer and Chief Operating Officer at AWM Capital
Host
Mena Hanna
Senior Investment Analyst at AWM Capital

What is AWM Insights Financial and Investment News?

A bite sized discussion on timely financial news and investment topics, to help you maximize your net worth and wealth for the next generation with Justin Dyer and Mena Hanna of AWM Capital.

Justin Dyer: It's the speed
limit of the economy, right?

The speed limit has just been reduced
effectively, by increasing interest rates.

Mena Hanna: The impact on our
decision-making is relatively minimal.

The way that we structure
portfolios is, you can think about

interest rates as a water level.

If that water level rises, that distorts
things and shifts things around.

But if you're on a boat, you
don't really care all that much.

You're gonna move up and down
with the water level, and you'll

be fine, in general, as long
as there's water in there.

Mena_Audio_2: If you have a normal
boat and you put on a cruise liner

anchor, well, interest rates go up, that
water level goes up, your boat sinks

because it's completely stuck in place.

Justin Dyer: Hey, everyone.

Welcome back to another
episode of AWM Insights.

It's your host, Justin Dyer, Chief
Investment Officer here at AWM,

joined as always by Mina Hanna,
Portfolio Manager here at AWM.

Today, we're gonna talk about
a, a riveting, uh, toc- topic.

I say that kinda tongue in cheek,
although, uh, you know, us finance nerds

actually do find it super interesting.

Um, and that's a great lead-in,
hopefully to, to get your attention.

Um, but the topic is interest rates.

So might not be the most interesting
to the, you know, casual listener,

but we're gonna do our best to try to
convince you and, and, and educate you

as to why it's an interesting topic.

It really does impact, um, everyone,
uh, in, in the world, uh, honestly,

because the United States is such a,
a critical part of the global economy.

But it, it also matters because
of the various or the, the general

topic we've been discussing over the
last, gosh, almost two months now,

um, uh, most certainly including
our conversation with, with Roger

Ferguson, who was at the Federal
Reserve, um, uh, uh, a few years ago.

And the Federal Reserve, as a reminder,
controls interest rates, and really,

the interest rates are kind of the cost
of money in, in the, the, uh, economy.

And, uh, timing was great because
that led into the Fed, uh, increasing

interest rates a couple weeks back for
the first time in, in quite a few years.

And so, uh, yeah, wanna talk through,
educate why that matters, why they

did that, and then more importantly,
or most importantly, potentially for,

for you all, it's how we think about
the impact on investing portfolios.

So let's jump right into it.

Um, Mina, a-as I kinda
alluded to, what happened?

Interest rates were increased.

Why?

And then the, the, the simple kind
of plain English walkthrough of like

what that actually means to the, you
know, let's call it average investor,

average, average person out there.

Mena Hanna: Yeah.

So interest rates were increased
because we've been seeing some

negative signs on the inflation front.

And what that means is, everyone here
understands, is things are just getting

more expensive at a more rapid pace than
the Fed wants to see and, and just I

would say society in general wants to see.

I think everyone sees,
sees that across the board.

Uh, if you go to the gas station or
you go to the supermarket, things

are just getting more expensive
a lot more quickly than we want.

So what the Fed does, and one of
the levers that they can use, is

they can raise interest rates.

And they did so by a quarter of a
percent, which is not all that much.

This is potentially the first of, of
a couple hikes that they might do, and

that's really just to hit the brakes
and slow down the economy and slow down

the pace of inflation and prices rising.

Justin Dyer: I would just, just to go
back to an analogy I think you used Uh,

in a past episode when we, we were talking
about the Federal Reserve, it's, it's

the speed limit of the economy, right?

And like the speed limit has just
been reduced effectively, uh,

by increasing interest rates.

Mena Hanna: Yeah, because people
were just driving too fast and, and

yeah, the price of, of energy has
potentially doubled this year, depending

on when you, when you look at it.

So that's, that's not really acceptable.

And one of the Federal Reserve's
core tenants, um, is price stability.

So when you do see prices move that
aggressively, that's obviously something

that they, they need to adjust for.

So what does this actually
mean for the average person?

Well, if you're looking to buy a
home, interest rates moving up is

going to make that more expensive.

What interest rates moving up
does technically is it makes the

price of a dollar more expensive.

And that might, that might sound
weird, but it is going to be a lot

more expensive for you to borrow,
and that ideally reduces consumption.

I was playing around with
this mortgage calculator.

If you were to take a $1 million
loan out to buy a home in 2020, your

mortgage payment would be $5,000.

If you were to do to that
today, it's around $8,000.

So that's $3,000 in extra cost just
from interest rates being higher.

And when you think about slowing down an
economy, that's $3,000 that the average

person just has-- doesn't have to,
to do other things with, to buy goods

and services, to potentially invest.

So it does, A, reduce the buying pool, but
B, the buying pool that is buying in at

these higher interest rates and lending
money at higher interest rates, they're

just a little bit more constrained than
they, than they previously were, which

is that dynamic of hitting the brakes.

Justin Dyer: Yeah, totally.

And now, um, perfect
explanation, perfect analogy.

I just wanna mention that the economy
is not this perfect machine where, okay,

interest rates start to go up, uh, and
then prices start to come down naturally,

especially in this situation where a big
driver of it, as you mentioned, is, is

oil, the price of oil, cost of gasoline,
cost of diesel, things like that.

The Fed isn't directly able
to control that, right?

There's obviously a conflict, a
war going on in the Middle East

that is a big driver of that.

Um, but they still have to act
in the capacity that they can.

So, uh, as with so many things
within finance and the global

economy, like there's, there's a lot
that goes into the, the equations.

A perfect explanation.

That is the core of what's going on
right now, but I just wanted to make

sure I added that, that nuance, right?

Uh, of course, as we, as we always do
in the investing world, there's always

like, well, but, or the what if, or
it depends kind of qualification.

So, uh, gotta, gotta get that in there.

Um, like I said, I wanna talk
a little bit about how we think

about the impact of an increase or,
and decrease, I guess, in rates.

Just let's call it movement
in, in interest rates when

it comes to our portfolios.

Do we, do we make changes,
drastic changes because of that?

Um, yeah, how-- just how do we
think through the, the impact on our

Mena Hanna: Yeah.

So the impact on our decision-making
is relatively minimal.

We build portfolios, and the
way that we structure portfolios

is you can think about interest
rates sort of as a water level.

If that water level rises, that, you know,
distorts things and shifts things around.

But if you're on a boat, you
don't really care all that much.

You're gonna move up and down
with the water level, and you'll

be fine, um, in general, as long
as there's water, water in there.

Um, what we do, I would say, and from,
from a saver standpoint, and we use a lot

of terms, protective reserve, safe harbor.

When the water level actually goes up,
as a saver, as someone who does have

a protective reserve, as someone who's
potentially allocating towards, um, a safe

harbor priority that's coming in April,
you're actually making more money now.

So as a saver, you're actually
doing a little bit better after this

interest rate hike actually happens.

Now, going back to your nuance point,
if you did not plan accordingly, and

if you took on a little bit too much
interest rate exposure, this past,

call it couple month stretch, was
actually terrible for you, and your

boat probably hacked the bottom or,
or has weeds in, in the propeller.

I don't know what analogy you wanna
use there, but you have to be very

thoughtful in terms of how you position
your vessel, how you actually build

your boat, because interest rates
rising to the normal person, and

unfortunately, a lot of our industry
takes on a lot of interest rate exposure.

If you did that, this is actually a
dangerous situation for the saver as well.

So what we do is we take
a short-term approach.

We match liabilities.

We make sure that client assets
are protected in rising and

falling interest rate dynamics.

So it, it doesn't really impact us or
our strategy all that much, um, but

it could be dangerous, um, for the
people that, that don't allocate assets

Justin Dyer: Yeah.

And, and just to be clear,
you said short term.

It's not like short-- We're
making short-term changes.

We're thinking about fixed income
specifically, um, and, and generally

allocating to shorter-term fixed
income, which is much more insulated

to movement in, in interest rates.

Um, I love personally the, the boat
analogy, so I'm happy you, you brought

that up because what we do is, is build
the custom boat, if you will, whereas so

much of the industry is building a, you
know, uh, a kind of one-size-fits-all

type approach to portfolio construction.

The, the, the, uh, most common, commonly
cited one out there is like a 60, 60/40,

so 60% stocks, 40% bonds, where there's
no clear alignment with the uniqueness

of the client in that situation.

So going back to what you said, well,
maybe that 40% in bonds or, or fixed

income is just built to match the broader
fixed income and, and/or bond market.

Well, guess what?

When ra- rates do move like this, we're
not getting into how and why this happens,

but just know when rates move up, those
bonds largely move down in price- Yeah

… and don't necessarily move down in
price in a way that protects the client.

Um, whereas like we said, the
customized boat is moving up and

down, really up and down with our
end client goals and priorities.

So there's a precision, a level of
customization and precision that's super

important for, for us to, to maintain.

Uh, so again, our clients
can, can continue down that,

that 100-year family journey.

It's important to also note that
this is all backward-looking.

The Fed is very much backward-looking,
and so much of what they're reacting

to has already happened within
the economy, and they're, they're,

they're reacting to the situation.

So with that, Mina, how do we
interpret, digest, make adjustments

or not with respect to our investment

Mena_Audio_2: Yeah.

So you can think, going back to
that boat analogy, you can think

about the fixed income portion of
our portfolios as being the anchor

that actually stabilizes the boat.

Now, we build boats with our clients.

Everything that you wanna accomplish
is the actual boat that needs to be

anchored in place by, by something.

And we-- what we just saw,
that one rate hike, that's not

that significant of a move.

We've seen a lot, a lot more, um-

Justin Dyer: I was gonna say, and,
and just to be, be clear, right?

That rate hike is kinda analogous to the
water level increasing or, or decreasing.

Mena_Audio_2: Exactly.

Yeah.

We saw, I believe it was
seven rate hikes in 2022.

So we've seen a lot of movement.

This could be the start of, of, you
know, a pretty substantial hiking spree.

We might have three to four more
hikes depending on how things unfold.

Ultimately, the boat is built well.

The anchor has to be the right size and
has to be constructed in the right way.

If you have a normal boat and you
put on a cruise liner anchor, well,

interest rates go up, that water
level goes up, your boat sinks because

it's completely stuck in place.

So when we think about how we
actually construct the anchor,

it has to be properly sized.

That, that is a custom process.

That's not something that
potentially moves all that much.

It's really proportionate to the boat,
proportionate to how much you want

things to move around potentially.

But there always has to be that
thoughtfulness of making sure that the

anchor isn't too heavy, the chain isn't
too short, and that you do have some

flexibility across the board and, you
know, that water level comes up, you're

not sinking and you're not drifting
to the other side of, of the lake.

Justin Dyer: Yeah, 100%.

I mean, to pull on that analogy
just ever so slightly more, right?

And compare and contrast, you
know, so often within our industry

with investing, they're trying
to predict that water level.

Yeah.

And when, when they miss, to your point,
if the portfolio isn't customized in the

right way, which it often is not, usually
it's very kinda one size fits all or,

you know, it's like You, you get what you
get, kind of go through the supermarket.

You have, you only have certain,
um, um, uh, number of selections to

really, to really choose from versus
like the tailored customized approach.

If they're wrong, to your point, and
the, and the anchor's too heavy, right?

Water level completely swamps it.

I think that's a great, great analogy.

I personally love it.

It's how we think about building
our portfolios, very custom to

each and every client and their
unique 100-year family journey.

Um, and, and really, you know, the
way to think about this is it's our

portfolios become immune, and l- I'm,
I'm using that term intentionally.

Within finance, there's a concept of
immunization, um, which, you know,

is more or less what it sounds like.

You want to, as best as you can, immunize
portfolios to, to movements like this

and make them very, uh, very much
protected as much as we possibly can.

Nothing is guaranteed, but protected
against, um, certain market,

market movement, market forces
in a customized, customized way.

So, um, I think we'll wrap there.

Hopefully, that analogy i-
is really, really helpful.

Obviously, interest rates, interest
rate movements are incredibly important,

both in terms of what's going on in
the, the, the broader US economy, but

it extends outward to the globe because
the US economy is such an important

driver, uh, of, of the global economy.

But it also has an impact on portfolios.

Now, we plan ahead for that, and the
way we build portfolios is very tailored

custom to each and every one of you, our
clients, um, and making sure that the, the

probability of you meeting those 100 year,
that 100-year family, uh, objective is

as protected as we possibly can make it.

Mena_Audio_2: Hopefully this was helpful.

Hopefully

Justin Dyer: you found it a little bit
educational, learned something new today.

Uh, if you have any more questions
along these topics or, or anything

obviously, uh, market-related,
we always love to hear from you.

It's super helpful to talk
about relevant topics.

Mena_Audio_2: text me 626-862-0355

Justin Dyer: Awesome.

And until next time, own your wealth,
make an impact, and always be a pro.

Thanks for listening.