The One Number That Matters Most to Your Investments

By Bill Alcheson

It sure was fun while it lasted, wasn’t it? A new president, promises of deregulation and new tax cuts tickled the stock markets for 16 months. Now, there’s a wall of worry being built based on the threat of a trade war with China, Middle East turmoil and, instead of deregulation, new regulations on technology companies that may slow the exuberant gains the highest-flyers have achieved.

There is an underlying aspect to all of this that I think plays a much bigger role than these transient events — interest rate changes and how they affect prices in a much bigger way than a tax on Chinese-made electronics. For the biggest purchase of your life, your house, the real determinant is no longer “location, location, location,” it’s “rates, rates, rates.” The housing market’s sensitivity to the rise and fall of interest rates is well known, but the interest rate — and the direction the market will turn when rates change — remains a little more mysterious and, as we head into a period where rates are going higher, this concept may be more important than any other indicator for investors and their money.

Time value of money

To better understand the impact of interest rates on the stock market and home prices, one needs to understand the time value of money concept (it’s ok to read on, this is not a math lesson). The time value of money simply means that, in most cases, the value of a dollar received today is greater than the value of that same dollar received in the future.

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