The Reserve Bank of Australia’s decision to slash interest rates by 50 basis points has many investors wondering what it means to their portfolio.
Our short answer? Not a lot.
The honest truth is that over the long term there will be lots of rate increases and decreases — the worst thing an investor can do is jump at short-term issues.
Are banks like Commonwealth Bank of Australia (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB), Bank of Queensland (ASX: BOQ) and ANZ (ASX: ANZ) any more valuable today than they were last week?
There are so many moving parts to a bank that it’s virtually impossible to predict how one interest cut might affect any estimates of their fair value.
Sure, consumers might be tempted to prize open their wallets and purses a fraction, but is that going to change the long-term structural challenges these brinks and mortar retailers face?
Of course there will be benefits and costs for different businesses.
But, the same will be true in reverse when rates go back up — and they will!
The market is rarely rational. As investors, we’re hoping to get the chance to buy shares in some businesses that end up being sold-off by the market because of irrational short-termism.
As the S&P / ASX 200 (Index: ^AXJO) (ASX: XJO) and the All Ordinaries (Index: ^AORD) (ASX: XAO) take off to a nine-month high, there are fewer obvious profitable opportunities, but all that means is you’ve got to look a little harder — and that’s precisely what Motley Fool Share Advisor Investment Analyst Dean Morel is doing.
The bottom line is we are unlikely to choose stocks just because of the impact of interest rates on their business, But the rate cut does have an impact on the mood of the market. So far it’s up, up and away for the market, but it won’t always be the case.
Don’t forget — interest rates were slashed because the economy is struggling. And don’t expect a V-shaped recovery.
As Wesfarmers (ASX: WES) CEO Richard Goyder said in the Australian Financial Review…
“I am not certain we are going to see a quick change in spending habits but it will make a difference to confidence and I think that would be good for the whole economy…because there is a lack of it at the moment.”
When it comes to investing, the same rules apply, interest rate cut or not. Simply buy good companies at cheap prices. Attractive dividend yields are the icing on the cake.
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Bruce Jackson is The Motley Fool Australia’s General Manager. Bruce has an interest in Wesfarmers, CBA, ANZ, NAB and WBC. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).