Rational Investing: Increasing interest rates call for financial adjustments

Clark Davis is a 34-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.

Thank you, thank you, thank you, Business Week magazine.

You did just what I predicted in my April column. As with your "Death of Equities" cover at the bottom of the bear market, you flat signaled the beginning of the real job growth that has been taking place in America when your March 22 issue cover carried the headline, "Where Are The Jobs?" With their jobless recovery litany having been proven totally false, the liberals will probably now take the position that the jobs being created are not good paying jobs. (Not true.) These guys should be designing bicycles, as they can shift gears faster and smoother than the best Shimano Derailleur.

With job improvement will come higher interest rates, a consequence of businesses expanding to meet increased consumer spending. Don't be alarmed. Stocks of good companies should not suffer as rates go up, especially when one considers that rates have already increased this year as the bond markets have been doing the Federal Reserves job by anticipating a discount rate increase.

As we suggested in a previous column, if you haven't already done so, refinance and lock up what is a historically low rate. And pay off those double-digit rate credit cards, if you have them. Keep your bond portfolio laddered with maturities going out no farther than seven years. Common stock holdings of financial institutions should be limited to those that have broad sources of revenues and are not overly exposed in any one geographic area or type of business. Unless you are a very patient, long-term investor willing to wait out the interest rate cycle, cut back (or eliminate) your preferred stocks, which are surrogates for bonds and which will decline in value if rates move up. You say you have already done all that? Then relax, you need not be afraid of Alan Greenspan.

The major unknown in the investment equation remains international terrorism. It is going to be a long, long struggle to ever minimize terrorism, let alone eliminate it. I doubt that it will be done in our lifetime. There are simply too many cultural and religious conflicts to deal with, making irrational any hope for an early and certain victory. But as the struggle continues, expect it to have a diminishing impact on the domestic investment arena. Not that we will become desensitized to the attacks or indifferent to the loss of lives, but that we will recognize and not back away from the magnitude of the effort or the time required to accomplish what must be done to ensure our way of life.

Which brings me to a request: Allow a small indulgence, if you will, as I share with you personal thoughts about events of late May and early June. Events about which I wrote in the following letter to our clients that accompanied their month-end portfolio reports.

"We paused from our daily routine a longer pause than we might have expected as the dedication of the World War II Memorial and the remembrances stirred by those events and the Memorial Day observances moved seamlessly, but painfully, into the anguish of a president's death the day before D-Day. Then came the commemoration of the Normandy invasion and the impact of the sacrifices made by those who served before us, followed by the images of the cortege, the rotunda queue, and the sunset service.

"I don't recall a period of national reflection and introspection ever being as focused or lasting as long. For many it was a personal experience that was, in some ways, more wrenching than the loss of a parent or close friend, in which the hurt never leaves, but at least is not triggered daily by every media source, nor by flags at half staff.

"It was a period some used as an opportunity to simply enjoy time off. For others, it may have been for trips to the malls for the neo-traditional sales at establishments that were, in my youth, closed for days of national commemoration. But for many, it was a time of quiet thoughts about personal and national values, of sorting out what was important from the noise of the day.

"Sometimes good and bad, tears and laughter, and a plethora of questions come in the same basket. We winnow the useless, the irrelevant, the distracting, and put into perspective the important, which we vow to hold onto in spite of all that might cause, as Thoreau wrote, the mass of men (to) lead lives of quiet desperation.'

"Let's hope that we all can hang onto those thoughts as we are, once again, exposed to the rancor, the pandering, and the prevarication of this election year."