Winners and losers this cup — and rates — day

The future is bright, even if the skies are sometimes overcast.

Horse race winner

Image source: Getty Images

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It's Cup Day.

And Rates Day.

Not a good day to be trying to get people to focus on anything else.

So… let's talk about races and rates. [In my best Beverly Hillbillies voice:] Interest rates, that is.

I'm not a horse racing fan, generally speaking.

I'm not sure it's humane, and I'm not sure a 'sport' that is essentially just a glamorous front for the gambling industry is deserving of such national attention and admiration.

Aaaaaand, with that, I've already endeared myself to some of you, while others are already calling me unprintable names.

Ah well. At least you can't accuse me of ducking the controversial topics.

Does it do me, or The Motley Fool, any good?

In the short term, no. Why risk alienating some current or potential customers?

But in the long term?

I don't know.

I like to think that having the courage of my convictions is a good thing, and I hope that my/our readers can respect that, and also respect the fact that civil disagreement is actually a good thing for our society.

And that you'll know that, whatever the topic — especially when it comes to finance — I'll bring that same candour and honesty.

Better that than some bland stand-for-nothing beigeness, I reckon.

Either that, or you've already stopped reading, and I'm kidding myself!

But, 'in for a penny, in for a pound', so let's talk about rates.

No-one knows for sure what the RBA will do this afternoon.

And whenever talking about interest rates, there are two parallel questions that need to be separated:

"What should they do?" is one of them.

"What will they do?" is the other.

Only one word apart, but they're very different questions.

And, frankly, for all of the grief the RBA gets when people disagree with them, no-one knows the future, and these econocrats have spent longer studying and practicing the art of monetary policy than almost anyone else in the country.

So I'm always careful about saying they're wrong.

It's like my line about Warren Buffett: whenever I disagree with him, I always assume I'm the one who's making the mistake!

For what it's worth, if I was RBA Governor, I'd lift rates by 0.5% (the cool kids insist you say '50 basis points' – and it's technically a more accurate way to describe it. But, well…)

And it's not because I don't care about mortgage payers. Or because I want to make life tough.

But because inflation is a scourge. Rates might go up and down, but prices? They go up and, with very few exceptions, stay there.

And permanently damage our standard of living in the process.

Inflation is 7.3%. Retail sales grew 0.6% last month. There's just too much spending, unfortunately.

It's a choice between two evils, to be sure.

But it's far, far better to have temporarily higher rates than permanently higher prices.

(By the way, we need to find a better way to stimulate or retard economic growth than just penalising one-third of the economy – about one-third of people own outright, about one-third are renting, and one-third are paying a mortgage. I have some ideas, but that's a topic for another day.)

So, that's what I think the RBA should do.

What will they do?

Again, no-one knows. But they have only just moved down from 0.5% monthly hikes to 0.25% hikes. I don't think they'll want to jump back up again.

I reckon 0.25% is the most likely course of action – but wouldn't be surprised if they decide to go back to 0.5%, at least as a one-off.

As an investor, I don't love higher rates, either. All else being equal, they push asset prices down.

Now, if I'm going to be a net buyer of shares, I actually should want lower prices while I'm buying. So that helps me.

But it doesn't feel good to see the portfolio down.

And some – many – people reading this won't be net buyers, because they're already retired and living, at least in part, off their Super and their personal investments.

But if the last 3 years (and 13, 23 and 33 years) have shown us anything, it's that volatility can't be avoided.

In fact, volatility is the ticket to the dance.

It's just what we have to put up with, to have an opportunity to enjoy the long term wealth creation that the share market has offered over the past century or more.

And so?

Well, if you're a net buyer, I'd keep on buying. That's what I'm doing.

And if you're in retirement?

Well, if you're fortunate enough to not need all of your dividend income, reinvesting at lower prices is giving you an opportunity.

And if you're not adding money to the market, my best advice is that, in the past, these periods have been uncomfortable, but temporary. And the market has never yet failed to regain, then surpass, previous peaks.

No guarantees – no-one knows the future – but I reckon that'll happen again this time around.

The future is bright, even if the skies are sometimes overcast.

Fool on!

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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