(Article by Eric Dupre, San Antonio Business Journal, 14 July 2006)

Managing your investment portfolio is not easy. It requires a constant awareness of market conditions, such as the interest rate environment. It also requires an understanding of how a change in interest rates may affect performance of your investment strategies to be able to determine the possible reactions to any change in rates. Then, you have to be able to factor in any expenses related to making or failing to take action. Finally, you must decide upon and take the appropriate action -- which may be inaction if your current financial plan is working for you.

The Federal Reserve is the national bank of the United States. It controls the money supply and thereby affects the cost and availability of money: interest rates and available credit. The U.S. banks borrow money from the Federal Reserve to lend to their customers. The interest rate charged by the Federal Reserve is called the Discount Rate. The higher the Discount Rate, the less money banks are willing to borrow and push into the economy. If too little money is pushed into the economy, consumers and business may have less money to spend on goods and services.

What is the current forecast? Rising interest rates. What goes down must come up. Interest rates just tend to work that way, which has many investors currently reevaluating their investment strategies. A good idea; but, don't be too quick to make changes. Sure, rising interest rates can hurt some strategies. Other strategies, however, can aid you in managing the risks of rising interest rates, including a laddered bond portfolio. The goal is to identify the appropriate strategies for you.

Over time, your financial goals, the amount of time you have to invest and your tolerance for risk will change and so will your financial plan.

Today, most investors understand this and realize the value of diversifying their investment assets among stocks, bonds, and cash equivalents. Not only can you diversify across asset classes, you can diversify across investment strategies. The idea, bearing comprehensive financial planning in mind, is to combine and implement the appropriate strategies in the right proportion to insulate your investment portfolio from the impact of rising interest rates.

Doubling investment

As interest rates, as well as the cost of living, continue to rise more and more people will need to increase their rate of savings and achieve realistic returns just to maintain their current lifestyles. One question many advisors continue to hear is "How long will it take my investment to double?" This is a common question many may have concerning their investments and think a calculator is needed to provide an answer.

But a calculator may not be needed at all. The tool to use is called the rule of 72 and, best of all, it is simple and free.

This is how it works. If an individual has an investment they think will grow at an assumed rate of return per year, then simply dividing that rate of return into 72 will provide a rough estimate of the number of years it will take for the investment to double in size.

For example, let's assume an investment is expected to grow at an average rate of return of 6 percent each year. Simply dividing six into 72 will give a rough estimate that it will take 12 years for this investment to double (72 / 6 = 12). This formula assumes a fixed annual rate of return and the reinvestment of all earnings. Keep in mind that very few investments offer a guaranteed rate of return and that an investment's past performance does not guarantee future performance.

Inflation

The rule of 72 may also be used to show the negative power of inflation. This may be an especially handy tool to those individuals in their retirement years and, also, for those approaching the retirement decision. Using this tool, an individual can estimate the number of years it will take for his or her cost of living to double. Or put another way, how long before an individual's purchasing power is cut in half.

For example, let's assume an individual is retired and forecasts an inflation rate of 5 percent per year. An inflation rate, in general terms, is the rate of increase in the prices of goods and services individuals purchase over time. Forecasting an inflation rate of 5 percent means the individual is assuming the prices of the goods and services he or she will purchase in the future will increase at a rate of 5 percent per year. Using the rule of 72, simply dividing five into 72 will provide a rough estimate that the individual's cost of living will double in 14 to 15 years (72 / 5 = 14.4).

Of course, this article is no substitute for a careful consideration of all of the advantages and disadvantages of an investment strategy to meet your goals.