What are some tips/advice on investing when interest rates go up?
Perspectives | Finance
NO/LA Angel Network
While I’m not an investment advisor and loathe providing investment advice, given these inflationary times, among the key questions to ask are: How long do we think this inflationary period will last? How severe do we think it will be? And, do we think the recovery will be a soft landing or hard landing? The answers may drive one’s investment strategy, as there are many choices for an investor during these periods: tangible assets like real or commodities (precious metals), inflation indexed bonds, high-yield bank loans, and cyclical stocks, among others. The best advice I can give is talk to a professional and factor the decisions into your broader investment objectives.
The toughest part of investing can be the emotional rollercoaster portfolio swings can bring. Statements with negative returns are unwelcoming for those that review them. Rising interest rates can have both positive and negative impacts on the financial markets…Understanding the symbiotic relationship between interest rates and the stock market can help investors understand how changes may impact their investments and thus be better prepared to make better financial decisions. Higher interest rates can negatively affect earnings as well as stock prices, depending on a company’s balance sheet and debt obligation…In the end, investors need to assess their risk tolerance, as well as their objectives.
“2022 has been a unique year for rising interest rates. If your portfolio isn’t already hedged, proactive sector and stock selection is critical. Active managers that can capitalize on the unique challenges this market has created are key. More importantly, these market conditions emphasize the need to engage in comprehensive, ongoing financial planning. A good financial planner recognizes that the unexpected can happen and will ensure that your plan will stay the course.”
P. David Soliman, managing partner at Faubourg Private Wealth
With rising rates, our thoughts turn to higher quality stocks with strong balance sheets, solid cash flow and pricing power. Growth stocks are generally vulnerable to rate hikes, as we have seen this year. Through July, though, prices for growth stocks seem to be rebounding. We lean toward shorter maturity with additions to fixed income to benefit from rising rates. Cash management should not be overlooked as interest rates begin to increase on short-term reserves and savings. Overall, we continue to rely on diversification to power long-term results and ease the transition from one economic cycle to another.
The Federal Reserve raising interest rates to fight inflation can cause the value of your existing bonds to drop, because investors will want to buy the newly issued bonds that pay the higher rates. Still, bonds continue to offer you some key benefits. For one thing, if you hold your bonds until maturity, you’ll continue to receive the same interest payments. Bonds can also help reduce the effects of market volatility on a stock-heavy portfolio. And if you own a mix of short-, intermediate- and long-term bonds, you’ll likely always have some bonds maturing. When they do, you can reinvest the proceeds into the new, higher-paying bonds.
St. Denis “Sandy” Villere III
Partner and Portfolio Manager
Villere & Co.
The Fed is raising rates to essentially throw a cold towel on an overheating economy, which consists of 9.2% inflation that we haven’t seen in 40 years. We were cautious on longer duration bonds — since bond prices fall as rates go higher — and the technology sector — since it suffers as the present value of technology companies future earnings decrease — but we believe much of this is in the market as the U.S. Aggregate Bond Index is down almost 9% year-to-date and growth stocks are down 23%. We would use weakness to buy these beaten-up sectors.