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80 - Zero Interest Rates should not reduce your Discount Rate

The DIY Investing Podcast

Release Date: 06/16/2020

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More Episodes

Mental Models discussed in this podcast:

  • Discount Rate
  • Equity Risk Premium
  • Second-Order Effects

Please review and rate the podcast

If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. 

Follow me on Twitter and YouTube

Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode80

Interest Rates

I discuss The Fed and their recent actions to lower interest rates to zero using the overnight lending rate. 

I also cover the equity risk premium and second-order effects of zero interest rates. 

Discount Rates

  • Your Required Rate of Return
  • Your need to save and invest can increase as rates fall

Summary:

When the Fed reduces interest rates to zero the first-order effect is a disincentive to save. Yet, zero interest rates should not reduce your discount rate because the second-order effect is because lower returns would increase your need to save money.