Experiencing my first mini dip as a new(ish) investor

A_T wrote: »

TrustyOven wrote: »

Sometimes, I really wish that people didn't use idioms.

Why do you wish this?

Presumably because using them to explain the reason for, or projected impact of, an economic or market event to people who aren't familiar with the movement of markets or the effect that's being described, will have to go look it up (an idiom being something with a meaning not determinable from the individual words used).

For example if something 'takes a bath' is that a good thing because it becomes the cleanest and most desirable thing in the room and everyone is impressed by its performance more than the dirty tired things around it, or a bad thing because it looks like it's going to drown? The latter of course.

If a fund or market index is 'tanking' or 'in the tank' does that mean it is powering along so strong that it'll ride roughshod over its rivals and knock you out with its performance like a WW2 behemoth? Or does it mean it is in the process of diving into a big tank of water in the manner of a circus clown? The latter of course.

If your equity or sector of choice is going gangbusters is that just as negative for its performance as it was for the criminal underworld gangs getting busted? Or does it mean it's loud, and packed with great initial excitement, speeding forward with great and immediate success, just like the 60-80-years-ago US 'Gang Busters' radio show used to open with a blaze of sound effects and great vigour. The latter of course.

One might say it would help communication if we didn't allow people to use idioms, though that would be throwing the baby out with the bathwater in terms of any goal to retain a high quality of discussion (ok, that's more of a metaphor than an idiom...)

Ahem, back on thread

In terms of the economics of an interest rate rise and its basic interplay with currency: prospective increased rates being offered create international demand for pounds and that 'supply and demand' effect increases the cost of pounds measured in other currencies. Or looked at the other way round it strengthens the buying power of sterling relative to other currencies and each [foreign currency unit] is worth fewer pounds. Unfortunately it means that if your portfolio gives high exposure to international assets and revenue streams denominated in those [foreign currency units] (non-pounds), those non-pounds will be "worth" fewer pounds when you translate their market value back to pounds (the currency you want to eventually spend).

That's one reason why many people building their assets to live and retire in the UK would choose to have more than 10% exposure to UK, unlike the OP who prefers less.

On the bonds side of things, if you have long-dated government bonds which are paying out a fixed amound of pounds per year in interest rate, and the world is in a period of ultra-low interest rates, those long dated safe bonds will be very valuable and people will pay quite a bit more than the 'face value' at time of issue, to buy them on the bond market now.

But when QE is withdrawn and / or interest rates rise, there is a drop in demand for those bonds - nobody wants to pay the previous highly inflated price of £300 for a bond paying £2 a year interest for the next 40 years, when they could just go out and buy a new bond paying £2 a year interest over the same timescale which only costs them £100; or alternatively put their money in an AA rated bank for 3% interest. Hence a drop in value of certain bonds and bond funds (some more than others depending on the duration and credit quality).

And finally some other factors at play if/when the interest rates go up:

a) it is harder for companies to borrow money from banks or money markets to get hold of cheap cash to pursue their long-term investment objectives which woukld have helped them grow their business or defend their market position, so it stifles corporate performance by increasing their expenses or limiting their investment power - not good for the market value of the company ;

b) likewise the higher cost of consumer credit (credit cards and loans and overdrafts) and greater expenditure on fixed monthly costs such as mortgage interest, means people have less money in their pocket to buy goods and services from companies and so the company's prospective income stream (and thus its market value) is suppressed;

c) generally if investors can get higher fixed returns from bonds or bank interest they will not want to pay as much for variable returns from dividend-paying or variable equity-based returns, reducing demand for company equities with a consequential reduction in market price for those equities.