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Ask the Financial Expert The Impact of Long Term Low Interest Rates

Ron Joelson •  June 22, 2016 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we’re talking about the impact of long term low interest rates.

Do you have a question for our financial experts? Email it to us at:

Ron Joelson

Ron Joelson is Northwestern Mutual's chief investment officer and oversees the company's general account, valued at approximately $200 billion as of June 2016.

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for more than $100 billion in assets under management as of February 2016.

The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below):

Mark: There was a little glimmer of hope back in December when, for the first time in nine years, the Fed raised rates; and it actually was looking like they might do that a few times in 2016. But here we are—they’re not going to be raising rates in June. So we’ve been in this prolonged low rate environment. What’s an investor to do?

Ron: I think we have to start with a discussion of the Fed. The Federal Open Market Committee just met, and they did make some changes to their policy. They’re still saying they’re expecting some rate hikes this year, but the number of committee members expecting only one rate hike jumped from one to six. So, it’s definitely a more dovish kind of feel coming from the Fed. I think they got spooked somewhat by the employment numbers that came out—the 39,000 new jobs, never mind the fact that there were a lot of other positive indicators. I think that was one of the things that really concerned them, and they said, okay, not now.

Even though—and Brent, you can comment on this—we are seeing some inflation expectation in terms of wage growth, we are seeing some signs that the economy, while certainly not overheating, is heating up a bit. I just wonder if whether maybe they’ve overreacted to one employment report.

Brent: I agree. And, I think, as we consider the impact of long-term low interest rates, I want to mention in Fed Chairwoman Janet Yellen’s press conference, over and over she kept saying “uncertainty.” While there is a potential for low rates for the long term, I also want to caveat that it’s not a certainty by any means.

With that kind of as a backdrop, over 22 years I’ve seen certainties about future forecasts turn into things that flopped. Back in 1999 we had a circumstance where we thought stocks were going to stay higher for longer—at least a lot of people did—and that got turned flat on its face.

So that’s kind of the backdrop for a longer-term investor, and I don’t think people should go out and make huge wholesale changes to their portfolios based upon a forecast which may or may not hold.

Mark: In that conference, she brought up the phrase “new normal.” I know that was coined six or seven years ago, but the fact is that she’s kind of indicating that these lower rates could be here for a while. So, anything specific you think investors should do?

Brent: I would take it back a step further and make it seem less scary. If there are low rates in the future, implicit in that forecast would be that inflation remains low. It’s not just nominal returns that you worry about; it’s real returns. So, if returns are lower in the future, as long as inflation is low, you will still earn a real rate of return.

In Japan, rates have been low for 20 or 30 years. But investors have actually earned positive real returns because inflation has also been low. And while the Japanese market has gone nowhere over the last 20 to 30 years, there certainly have been plenty of bull markets. So if you have a process that can help identify some of those active management opportunities on the security selection and asset-class sides and make minor tweaks to your overall portfolio, you can add some value there. At Northwestern Mutual, we haven’t changed our overall risk posture.

Ron: It’s important not to get too overly concerned or excited over the short-term volatility, and we’re certainly staying the course. In fact, we had a meeting on the institutional side about whether any of this changed our overall risk posture, and the answer was no. We’re actually keeping our same risk allocation for the Northwestern Mutual general account [valued at $200B] even prior to all of these events.

Mark: So the theme is “stick to the fundamentals.” In active management, they’re looking at fundamentals of companies and markets. And when you’re doing your own investing, it’s really more about planning, your long-term goals and real returns.

Ron: I would just say there may be more interest in interest rates, but it doesn’t mean interest rates are more interesting.

Hear more from Ron, Brent and Mark in the “Ask the Financial Expert” podcast:

Do you have a question for our financial experts? Email it to us at:

The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise; and conversely, when interest rates rise, bond prices typically fall.  This also holds true for bond mutual funds. When interest rates are at low levels there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates and are not obligated to return the investor’s principal. Additionally, high-yield bonds and bond funds that invest in high-yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

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