How to Prepare for Higher Interest RatesSubmitted by MIRUS Financial Partners on September 18th, 2015
Interest rates have been low for a while now. When rates have been this low for this long, it’s easy to get complacent. But now that the Fed has started to seriously consider ways to increase those rates, this may be a good time to review your financial portfolio. Whether you’re leaning towards short-term or long-term investments, there are some strategies you should consider if you’re looking for an opportunity to increase your investment income as interest rates change.
Low Interest Rates May Warrant an Investment Review
In the past, low interest rates have help investors of both equity and fixed-income products. However, if we’re seeing the beginning of a rate reversal, several types of investments should be reviewed carefully. For example, rising interest rates have traditionally boosted the real estate sector. Funds that focus on home building and construction should be considered.
If rates rise, Utilities and Real Estate Investment Trusts (REITs) are generally sold off. Stocks and funds that have high dividend yields become less attractive. These equity sectors become less attractive because they usually hold large amounts of debt or may have longer-term contractual lock-ins that makes them less attractive when interest rates rise.
You’ve probably heard me say that if prices fall, bond yields rise and vice versa. Bonds become much more attractive in an economy with rising interest rates. If your portfolio needs to adjust for a higher interest rate economy, you may benefit from a “bond ladder.” A bond ladder is a series of bonds that mature at regular intervals, such as every three, six, or 12 months. As rates rise, bonds are then reinvested at the new, higher rate.
Diversity is the Best Policy
You may have noticed that this blog is peppered with “ifs.” That’s because, at the end of the day, no one really knows where interest rates are headed, how high they’ll climb or how long they’ll stay low. In any rate climate, diversification is a prudent approach to financial planning. Creating a portfolio with a mix of stocks, bonds and mutual fund that represent different market sectors is a sound way to mitigate risk.
While the Fed continues to debate what they’ll do to tighten monetary policy, you need to talk with your financial advisor to assess the rate sensitivity of your portfolio holdings, understand which securities might be more at risk, and see how your holding should be structured to best meet your personal financial goals.
Mark A. Vergenes is President of MIRUS Financial partners, 110 E. King St., Lancaster, PA 717-509-4521 or firstname.lastname@example.org Investment Advisor Representative offering securities and advisory services offered through Cetera Advisor Networks LLC., member FINRA/SIPC. Cetera is under separate ownership from any other named entity. MIRUS Financial Partners nor Cetera Advisor Networks LLC. give tax or legal advice.