Investors should keep a close eye on interest rates. In some cases, high interest rates are good news — for example, when an investor expects a return on a high-yield financial account or investment vehicle. In other cases, however, high interest rates can damage the performance of an investment portfolio. This is why investors should always be prepared for sudden market changes.
Since interest rates have been hovering at near historic lows for a long time, it is understandable that investors have forgotten that what falls will one day rise. Interest rates are expected to rise in parallel with the increase in global economic activity. When this happens, fixed income investors who invest in both the long and short term, and who have not prepared for rising interest rates, may suddenly lose the opportunity to increase their monthly income. For this reason, it is time to start preparing for this shift and to make the most of the increase in interest rates. In this article, we will present 9 strategies to prepare for rising interest rates.
1.) Consider working with an active portfolio manager
Working with an active investment portfolio manager is invaluable in many respects. Effective work with a yield curve is a form of art, and many overlook it. In reality, however, working with active trustees who control this art and who are dedicated to fixed-income assets is the best way to protect their investment portfolio from the threat of rising interest rates.
2.) Look at fixed instruments
Consider buying fixed deferred annuities from highly rated insurance companies. Read a little more about this type of investment vehicles and understand all their advantages and disadvantages. After the case, you can buy individual bonds that you will hold until they mature.
3.) Fix your mortgage with low interest rates
Fix your long-term mortgage with low interest rates now, that is, before interest rates rise. There is no better time to take such a step, as it is improbable, that interest rates have fallen in the near future. It is crucial to lock in the interest rate at the lowest possible level.
4.) Explore the public service sector
The public service sector has demonstrated its resilience in markets with rising interest rates. As a result, many expect public services to still provide investors with the opportunity to offset rising interest rates. However, historical performance never guarantees future results, so caution should be taken.
5.) Invest in shares
Rising interest rates will not only hurt the holding of fixed-income assets, but may also cause the yields of these securities to not be sufficient to maintain purchasing power. In the current situation, you cannot think of bonds as “safe investments”. Since their price doesn’t normally flutter as much as the share price, they are likely to pose a greater market risk that will prevent you from achieving your investment goals. In the event of rising interest rates, investors should look at the shares of raw materials companies. Raw material prices often remain stable or fall when interest rates rise. Companies using these materials for the production of finished goods, or simply in their day-to-day operations, will see a corresponding increase in their profit margins as their costs decrease. For this reason, these companies are seen as a good way to hedge their investment portfolio against inflation. In addition, rising interest rates are good news for the real estate sector, so companies benefiting from building can also be a good plan for investors. Poultry and beef producers may also see an increase in demand as rates rise due to increased consumer spending and lower costs.
6.) Bet on the long term
This is a dispute between macroeconomics and microeconomics. Interest rates are set by the U.S. Federal Reserve and therefore fall under the macroeconomy. However, changes in the portfolios of individual investors form a microeconomic. No investor can influence macroeconomic events on their own. Instead, investment portfolios should be built to withstand or even benefit from macroeconomic changes. Smart investors are betting on a long-term time horizon by adopting a financial plan that predicts such changes and is adequately prepared for them.
7.) Continue to invest and diversify your funds
As an investor, you never want your money to just be deposited into a bank account, even when interest rates are rising. Instead, continue investing and diversifying your financial assets. With a properly diversified investment portfolio, you can protect your finances from inflation by letting them grow through multiple different investment vehicles.
8.) Don’t change your investment strategy because you’re afraid
Don’t change your investment strategy just for fear of changing interest rates. If your investment strategy relies entirely on changing interest rates, such as loans or real estate, then it already contains some kind of isolation to protect you from changing interest rates. Stick to your strategy of rising interest rates just as you would when interest rates were low. Making drastic changes to your strategy just because you are worried about the current situation can lead to failure.
9.) Reduce the maturity of the bonds you hold
Another point you should make when raising interest rates is to reduce your exposure to long-term bonds while strengthening your position in short- and medium-term bonds. Short- and medium-term bonds are generally less sensitive to interest rate increases than longer-term bonds. However, the transition to short-term bonds is not as attractive as these bonds provide investors with less earning potential than longer-term bonds. If you don’t want your portfolio to generate lower returns, try combining short-term bonds with other investment vehicles, including floating-rate debt. This may include, for example, bank loans or securities protected by the United States Treasury Department. Historical data show that interest rates simply cannot be kept low. However, the speed and pace at which they will grow is very difficult to predict. Those who do not pay attention to the development of interest rates may lose valuable investment opportunities. There are numbers of investment strategies for how investors can prepare for rising interest rates. It is important to act on time.
