Over the past year, the rate of inflation that consumers have experienced has been about 7.5%. In response to this, the Federal Reserve has indicated it will raise interest rates in the near future. (1) An increase in rates should help combat inflation, but it also has several implications for the stock market. If you’re worried about how these changes will affect your portfolio, consider these three ways to invest in a rising interest rate environment.
There is an inverse relationship between bond prices and interest rates, meaning as interest rates rise, bond prices fall. This is because newly issued bonds have higher rates of return than older bonds, reducing the demand for the older bonds.
Not all bonds are the same, so they act differently in rising rate environments. Be sure to consider these characteristics as you assess which investments to hold in a rising interest rate environment.
Even though rising interest rates are meant to reduce inflation, it is still important to consider inflation-adjusted investments for your portfolio. The Fed has signaled that they will increase interest rates eventually, but the timeline is not set in stone. As such, maintaining your purchasing power in the meantime is very important, especially considering how quickly prices have been rising. Treasury Inflation Protected Securities (TIPS), variable rate ETFs, and certain stocks are all investments that could perform well in inflationary environments. Keep in mind that no matter which investment options you consider, they should always be assessed in the context of your overall financial plan.
Looking all the way back to 1971, we can see that the interest rates of the last two years have been historically unique. In the 1970s, rates slowly moved up from the mid-7% range to a peak of over 16% in 1981. Throughout the 1980s, rates continued in the double digits until tapering back to the 7% level during the 1990s. Even after the 2008 housing bubble, rates were still hovering around 5%. So the 2.68% rate during the height of the pandemic was truly a historic event. (2)
Though rates have started to rise, they remain well below the pre-pandemic average, meaning this could be the perfect time to refinance your mortgage or pay down credit card debt before the required interest rates rise. No one can say for sure when the Fed will raise rates, but the most recent news suggests it won’t happen until after their March 15th policy meeting. (3) Reassessing your debt could be a great way to take advantage of the historically low rates before they are gone for good.
The good news about rising rates is that they don’t have to wreak havoc on your financial plan. At Wealth Advocate Group, we can help you assess your portfolio and make the appropriate changes. To learn more about our wealth management process, call 440-505-5704 or email jbrown@Wadvocate.com to schedule an appointment.
John Brown is a wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. With over 10 years of experience in the financial industry and a background in accounting, John provides sophisticated and specialized services to his senior executive clients who need the expertise of someone well-versed in concentrated securities, stock options, and restricted stock strategies, as well as the risk and tax burdens that come along with their compensation. John has a bachelor’s degree in accounting and financial management from Hillsdale College and is a CERTIFIED FINANCIAL PLANNER® professional. John is known for his thorough approach, often asking questions and bringing up details his clients have not considered. He strives to address every piece of his clients’ financial picture to make sure they are on the path toward their goals and financial confidence. In his spare time, John and his wife, Christina, enjoy traveling and staying active. You can often find him spending quality time with his friends and family. To learn more about John, connect with him on LinkedIn.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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(2) https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-fixed
