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The Biggest Threat From A US Rate Rise

As sure as eggs is eggs, interest rates are set to rise. If they don’t go up by September, then they are quite likely to rise by Christmas.

Talk of a rise in US interest rates has been ruffling market feathers for a while now – stock prices have been going up and down like a fiddler’s elbow.

First we had “taper tantrums”. Now we have “rate rage”. It seems that markets always have something to worry about.

Good is bad

There was a time when traders would pray for bad US economic data. It meant that the US Federal Reserve would have to pump more money into the system.

But bad economic data cuts little ice these days. Firstly, it is because America’s Quantitative Easing programme has ended. The second reason is because the data from the US is not half bad.

So traders are now hoping that any new economic data won’t be quite as good as forecast. That is because good data could mean that the US Federal Reserve might have to raise interest rates sooner rather than later.

Welcome to the bizarre world of perverse stock-market logic, where traders just love to make things up as they go along.

For some investors, though, the trader-induced market gyrations can be a bit too much to stomach. Consequently, they prefer to sit it out. But that could be a mistake.

Sitting things out, whilst waiting for a US interest-rate decision is probably the biggest threat to us, private investors.

Building wealth

As much as we would like to think that we can second-guess the market, we can’t. So, trying to predict what Janet Yellen might or might not do is a waste of time.

Instead focus on the things that matter. That means continuing to add money to your best shares, regardless.

It is our best way to build wealth over the long term.

Consider the owner of Cold Storage supermarkets, namely, Dairy Farm International (SGX: D01). Over the last 20 years, the company has probably seen more major economic upheavals than some of us have had hot dinners.

For instance, it has witnessed the transition of Hong Kong from colonial rule to a Special Administrative Region of China. It endured the Asian Financial Crisis. It stomached the bursting of the dot.com bubble and it has endured the Global Financial Crisis.

Despite the many disruptions, Dairy Farm has seen its share price rise around 770% over the last twenty years. That equates to a market-beating return of 11.4% a year.

It gets better….

If the dividends generated by Dairy Farm were reinvested, the total return jumps to 2,497%. In other words, an investment of S$1,000 made in Dairy Farm in 1995 would be worth around S$26,000 today.

Dairy Farm is not alone in delivering double-digit returns over the last two decades.

Boustead Singapore (SGX: F9D) has delivered 14% annually; Hongkong Land (SGX: H78) has rewarded shareholders with a 12% annual total return, while Jardine Matheson (SGX: J36) has achieved a total return of 14% a year.

The biggest mistake that we could have made over the last two decades would have been to allow economic events to scare us.

The most sensible thing would have been to add more money when prices were low because a beaten-down market is a wonderful place to find bargains.

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock- Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock- Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.