For the first time since 2018, the Federal Reserve raised interest rates, and many experts agree they will increase at least two more times in 2022.

As an investor. It’s important to keep in mind that certain asset classes, including real assets, perform better in a high-interest environment than others. Now is a great time to check on your portfolio and make sure you’re prepared for the coming economic changes. 

Keep reading for an overview of what’s happening with our interest rates, why it affects  inflation, and how investing in real assets like real estate can help you make the most of this environment. 

Why are Interest Rates Increasing?

The Federal Reserve can often speed up or slow down economic growth by adjusting the federal funds rate (the interest rate that banks charge to other banks who borrow money overnight).

In periods of slow economic growth — such as the height of the pandemic — the Fed will often lower interest rates to make it easier for people to borrow money and put it back into the economy. In periods of high growth, the Fed will typically increase those same rates in an effort to slow down inflation. 

Since inflation recently reached its highest rate since 1981, the Fed is looking to keep prices under control by increasing borrowing costs, which is why they’ll likely raise interest rates again in the coming months.

Invest in Real Assets to Build Long-Term Wealth

What do these rising interest rates mean for investors? Like most economic changes, the answer depends on the type of investment and the general public’s attitude toward the economy. 

Interest rates don’t directly affect the stock market as a whole, but they can have major impacts on individual stock prices. This is one reason why it’s important to diversify your portfolio with alternative assets, because those assets aren’t directly correlated to the stock market. 

In particular, investing in real assets can help you build long-term wealth in the midst of rising interest rates.

Take real estate, for example. If you purchase a rental property today and borrow $100,000 at 3% interest, you’ll pay $3,000 for the next 30 years. Even if interest rates rise to 7% next year, you will still be paying that 3% rate.

At the same time, we know that inflation will likely continue over time, so we can confidently say that $3,000 today can buy you much more than it will in 30 years. By securing a mortgage now, you’ll essentially pay it back over time with cheaper and cheaper dollars. And as rent increases along with inflation, your profits will go up even as your mortgage payment stays the same.

In this way, investing in real estate and other real assets can help you build wealth in the midst of both rising interest rates and inflation.

Find a Great Investment Partner

Investing in alternative assets can feel overwhelming, especially for newly Accredited Investors. At First Generation Capital Partners, we’re committed to both helping you reach your investment goals and serving as a resource for continuing to educate yourself about the process of building wealth.

If you’re interested in learning more about how real estate and other real assets can help you secure long-term, generational wealth for you and your family, contact us today.