As any investor knows, the financial markets are always fluctuating—and so are interest rates. Right now, we’re in a period where interest rates are rising—and that’s been a cause for concern among some investors. But what do rising interest rates actually mean for you? And, how should your investment strategy adapt or evolve to address these rising interest rates?
What Rising Interest Rates Really Mean When we say that interest rates are rising, we mean that the cost of borrowing has gone up. People, corporations, and even the government need to borrow money sometimes, and as interest rates go up, so does the cost of any loan you obtain. For individual investors, this means home mortgages and auto loans are now a bit more expensive than they were a few years or even a few months ago.
It may sound like rising interest rates are a bad thing, but that’s not entirely true. There are pros as well as cons. For one thing, rising interest rates are often offset by rising wages; so a new automobile loan may cost you a bit more these days, but at the same time, the job market is good and incomes are rising. It’s really a pretty even trade-off.
Additionally, investors can secure high interest rates on new bonds, which can be valuable to their portfolios.
Dealing with Higher Interest Rates
With all that said, there are a few strategies investors should consider as they seek to adapt to these rising interest rates.
The first strategy that we recommend is moving to short-term bonds. These usually pay a higher rate of interest than cash or money-market accounts, and they generally don’t see as much fluctuation in their price, at least not when compared with longer-term bonds.
Something else we recommend is a bond ladder. A bond ladder is defined by buying a series of individual securities, which may include municipal, corporate, or treasury bonds, across a spectrum of maturity dates. So, when one bond matures, you can roll the proceeds into a new bond with a more distant maturity date. The reason this is beneficial is that it allows you to reinvest some of your portfolio at higher interest rates. And, it doesn’t require any sort of market timing on the part of the investor.
Developing a Strategy for Your Portfolio As interest rates rise, some investors get jittery—but it’s really nothing to be alarmed by. Through some simple revisions to your investment strategy, you can not only weather these rising interest rates, but use them to your advantage. Short-term bonds and bond ladders are especially good approaches.
We’d love to chat with you more about some of the steps you can take to ensure your portfolio is robust and that your retirement plans are on track. Reach out to Stonepath Wealth Management today to speak with an advisor.
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