What are some ways investors should change their strategies with rising interest rates?
Perspectives | Banking + Finance
Suzanne T. Mestayer
The impact of rising rates on the markets is real, creating high volatility and reduced values of both stocks and bonds. For long-term investors, work with your advisor to review the allocation of your investments within your overall strategy. Diversification remains a simple yet powerful tenet of investing. The growth darlings of the stock market have dropped significantly, and attention has turned to value-oriented stocks, which generally perform better in a rising rate environment while also delivering dividends. Real estate and commodities are also considered inflation hedges. Consider them all in your allocation. Overall, the reduced prices of today provide opportunities for future upside, but remember that even the best investor cannot reliably predict the bottom.
If you follow the financial news even casually, you may know that bond yields have been rising since the year began. What does this mean to you, as an individual investor? It might be positive news – the 10-year Treasury yield is usually a good indicator of investors’ confidence about the economic outlook. However, sharp jumps in these yields certainly can cause sudden pullbacks in stock prices, as has occurred recently. But such drops often prove to be short-lived, with stocks eventually rallying. Keep in mind, though, that bond yields and interest rates are closely related, so if interest rates also go up, the value of your existing bonds could drop. On the other hand, rising interest rates can help and hurt stock prices, depending on the type of industries involved.
Overall, you’re better off not making drastic changes to your portfolio in anticipation of interest rate movements. Instead, stick with a personalized, long-term investment strategy based on your individual goals, risk tolerance and time horizon. Ultimately, your moves, not external forces, drive investment success.
Chairman and CEO
Rising rates are one of many risk factors we consider in our investment decisions. The clear loser in a rising rate environment is fixed income, so we have avoided that. We generally focus on investing in fundamentally sound companies with strong margins and cash flow generation, organic growth opportunities and low debt. These companies should perform relatively well in a challenging economic environment. There are a number of quality and value strategy ETFs [exchange-traded funds] for investors to focus on these types of companies. It’s also important to consider other prevailing risk factors and their potential impact on various asset classes.
Wealth Management Specialist
We are recommending that people take advantage of the current rates on treasury I bonds for their shorter-term savings needs. Rates are now 9.62% until October of this year and will readjust based on inflation. Note: Individual investors are limited to buying 10,000 each per year. Investors should also be looking to shorten maturities of bond and bond portfolios in order to be able to buy higher interest rate bonds as rates rise. They should keep an eye on recession probabilities and make sure they own high quality bonds in the event the economy moves toward recession.
Michel M. Legrand
Wealth Management Advisor
Work with a financial advisor to help you design and stick to a well-developed plan with strategies that work through varying interest rate environments. For long-term investors, capitulation to a bear market by fleeing equities can often be a tragedy from which retirement plans may never recover. The only way to be assured of capturing equities’ premium returns is by riding out occasional declines. Of course, there is no single strategy that is right for every investor. The best approach is to analyze a broad spectrum of ideas and choose the right ones, or right combination that best suits your needs.
Derek L. Fossier
Director of Investments
Equitas Capital Advisors
A balanced portfolio, and one meant to withstand rising interest rates, includes investment in companies with pricing power. Look for companies that have strong market position and few competitors — they can raise prices as needed. An example is an MLP (Master Limited Partnership) pipeline, which basically moves oil from the well to distribution centers. Avoid expensive growth stocks, especially those without profits, and avoid longer-dated fixed income.