Federal Reserve Chairman Ben Bernanke on Sunday cracked the door open a bit more to the idea of raising interest rates to pop potential bubbles, reinforcing the view that rates are set to go up before 2010 bows out.
This should not be a surprise to investors, given the historic flooding of money into the financial system globally, in the form of stimulus measures since the financial crisis began in 2008.
Consumers and businesses that have been gorging on a bountiful supply of almost free money have undoubtedly built in demand pressure, which could very well cause prices to increase.
And the fact remains, that high deficits tend to create higher rates as sovereigns need to borrow funds to pay their ongoing debt load.
As an individual investor, you need to be aware that interest rates pressure would be the dominant theme in 2010, and position your portfolio accordingly.
Consider shorter-term fixed income assets, which would be less affected by raising rates than the longer maturities. Commodities, which tend to do well when prices rise, could also provide a significant hedge against inflation.
Third, recognize that raising interest rates would no doubt negatively impact real estate prices as mortgages raise and defaults increase. Be cautious as a real estate investor.
Be proactive as you watch in 2010 for the direction of rates; your investment strategy demands on it.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.