Don’t Panic About Interest Rate Increases: Seek Profit Instead
After a long period of historically low interest rates, the Fed began reversing the trend and raising interest rates to combat rising inflation, which hit a record high of 9.1% in June. The Fed opened the strategy with a modest 0.25% hike in its key rate at its March meeting, then announced a 0.5% hike on May 4 and a 0.75% hike in June, the largest rate hike since 1994.
The Fed has signaled that it is prepared to raise rates periodically throughout 2022. At their June meeting, Fed Chairman Jerome Powell noted that a “75 basis point increase is unusually significant, and I don’t expect movements of this magnitude to be common. “Although he expects a 50 or 75 basis point hike at the July meeting if inflation remains overheated.
While many investors worry about the effects of rising interest rates on their portfolios, there are plenty of investment options that tend to thrive in a rising interest rate environment. Reevaluate your portfolio and consider these strategies to maximize your potential return and protect your investments during the Fed’s rate hikes this year.
High yield bonds offer fixed security
Rising interest rates tend to reverse strategy in the bond market. Rather than chasing high-quality, long-term bonds, you’ll get better returns by investing in high-yielding bonds, especially lower-quality corporate bonds.
Morgan Stanley analyzed the bond market after the election of President Trump, as investors anticipated higher interest rates. The analysis revealed that between November 8 and December 31, 2016, US Treasuries returned -2.63% overall and -1.82% for investment grade bonds. Meanwhile, high yield bonds generated a positive return of 1.75%.
High yield bonds are less sensitive to interest rate increases because they track the equity market more closely. They tend to have shorter maturity dates, making them less influenced by rising interest rates. It is important to note, however, that holding your bond until full maturity is the key to investing in bonds. They also feature a higher interest payment, or coupon, which combines with the movement of the bonds to determine the total payment, so the higher coupon is able to absorb the effect of a rise in rates. of interest.
Lower quality corporate bonds – those rated single B and triple C – perform best during these periods, as they tend to be held by smaller companies with less leverage. Their lower ratings are based on size alone, but also require their bonds to carry a higher coupon. As the economy recovers, these small businesses are doing better financially and tend to be better able to service their debts.
Emerging Market Debt Holds High Potential
Emerging market bonds are issued to service the debt of developing countries and companies in these countries. They have become increasingly popular since the pandemic due to their increasing credit quality and higher yields and can be a great option for improving investors’ risk-return profile of their fixed income portfolio.
As the global economy continues to grow and rebound from previous years, rising global trade and commodity prices make investing in emerging market debt attractive for investors looking for yield. higher.
Companies with sustainable business models
The best way to feel comfortable with your investments in times of rising interest rates is to have a portfolio built for the long term, which will include a solid portion of investments in companies that remain stable in all types of environments. Think of a blue chip company, like Costco (COST), which has thrived in the unstable environment created by the pandemic, creating a strong return for investors.
Although these types of companies will follow some of the ups and downs of the market, over the long term their stock values should go up. You can ignore daily market fluctuations because your investments are in the long-term stability of these blue chip companies. In fact, when these companies experience a small decline, you might consider buying more stocks knowing that they might rebound over time.
Stick to your investment policy statement
Most financial planners will work with their clients to develop an investment policy statement, which outlines the client’s long-term goals, risk tolerance, and a strategy for achieving those goals. In times of market volatility, sticking to your investment policy statement is more important than ever.
If you and your advisor have understood that you need a certain allocation ratio to be at the level of risk you can afford at any given time, don’t deviate from that allocation ratio. For example, if your investment policy statement says you want to earn 6% and to earn that you should have 70% equity in the long term, stick with that.
As interest rates rise, now would be a good time to talk to your financial planner. You need to ensure that your long-term investment strategy remains intact. Then you can make minor adjustments to shift investments to companies and options that perform well when interest rates rise.
Securities and investment advisory services offered by Royal Alliance Associates, Inc. (RAA) member FINRA/SIPC. RAA is separately owned and other entities and/or trade names, products or services referenced herein are independent of RAA.
CEO and Co-Founder, Mint Wealth Management
For over 18 years, Adam Lampe has helped high net worth individuals, affluent families, foundations and institutions achieve their financial goals through holistic financial planning. As CEO and co-founder of Mint Wealth Management, he leads all development efforts within the company. Along with his extensive work serving clients, Adam also teaches retirement planning courses at satellite campuses of Lone Star College and Prairie View A&M University around Houston.