How to Deal with Rising Interest Rates
Increase your cash holdings., Invest in short term bonds., Transfer to interest rate hedged securities., Invest in variable rate securities., Invest in inverse security funds.
Step-by-Step Guide
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Step 1: Increase your cash holdings.
A very conservative move, when you know that interest rates will be rising, is to sell off some of your bonds or stock investments for cash.
That cash can then be deposited into savings or money market accounts, with interest rates that will presumably be rising along with all the other rates.
You will have ready access to cash when you need it, and the money will be in a relatively “safe” place that is guaranteed to grow.While this is a safe and conservative step, you are not likely to gain much return on your money.
Interest rates in savings accounts or money market accounts are among the lowest there are.
You are trading return for security. -
Step 2: Invest in short term bonds.
Bonds are more secure and more stable than stocks, so your money is more likely to be protected from loss.
Government bonds also tend to pay somewhat more in interest than money market or savings accounts, so you can continue to earn a bit more with your investments.
Short term bonds will benefit from rising interest rates, and your interest payments on the bonds will increase as well.Some financial advisers recommend a “bond ladder.” This is a system of bond investments, in which you stagger your purchases of several bonds.
Plan the timing so that as one bond matures, you use the money to invest in a new one, with a maturity date just beyond the longest one that you currently hold.
With such a system, you will always have some bonds paying interest, and one or two nearing maturity.
Each new purchase will presumably pay out at a higher interest rate than the bond before. , If you wish to accept some higher risk and keep your money in securities and stock portfolios, you can still limit some exposure by investing in portfolios that hold treasury or investment grade corporate bonds.
You will want to research these carefully and know what the portfolio is holding.
The concept of interest rate hedged securities is relatively new and untried.
But if you find the right product, you can earn more than in traditional bonds., These do not promise a specific interest rate but fluctuate with the changes in the market.
Your hope is that as interest rates rise, these stocks will also pay higher dividends.
There are two main types of variable rate securities:
Investment-grade floating rate securities.
These are investments in companies with high credit ratings.
Interest payments on these securities are reset periodically, so as interest rates rise, then your payoff is expected to increase as well.
Bank loan securities.
You are investing in bank loans that carry lower-grade ratings.
As a result, the interest payments tend to go up, but so does your risk.
Bank loans carry a risk of loss if borrowers default.
But the payoff may be worthwhile. , Inverse funds are those products that tend to increase in value as interest rates rise.
However, the risk is much higher than any of the other means discussed.
You should be aware of your investments or work with an experienced broker or financial adviser if you wish to go this route.
Inverse funds tend to fluctuate quickly.
You run the risk of buying at a peak and selling low, thereby losing money.
Timing is more important with this type of investment than any of the others. -
Step 3: Transfer to interest rate hedged securities.
-
Step 4: Invest in variable rate securities.
-
Step 5: Invest in inverse security funds.
Detailed Guide
A very conservative move, when you know that interest rates will be rising, is to sell off some of your bonds or stock investments for cash.
That cash can then be deposited into savings or money market accounts, with interest rates that will presumably be rising along with all the other rates.
You will have ready access to cash when you need it, and the money will be in a relatively “safe” place that is guaranteed to grow.While this is a safe and conservative step, you are not likely to gain much return on your money.
Interest rates in savings accounts or money market accounts are among the lowest there are.
You are trading return for security.
Bonds are more secure and more stable than stocks, so your money is more likely to be protected from loss.
Government bonds also tend to pay somewhat more in interest than money market or savings accounts, so you can continue to earn a bit more with your investments.
Short term bonds will benefit from rising interest rates, and your interest payments on the bonds will increase as well.Some financial advisers recommend a “bond ladder.” This is a system of bond investments, in which you stagger your purchases of several bonds.
Plan the timing so that as one bond matures, you use the money to invest in a new one, with a maturity date just beyond the longest one that you currently hold.
With such a system, you will always have some bonds paying interest, and one or two nearing maturity.
Each new purchase will presumably pay out at a higher interest rate than the bond before. , If you wish to accept some higher risk and keep your money in securities and stock portfolios, you can still limit some exposure by investing in portfolios that hold treasury or investment grade corporate bonds.
You will want to research these carefully and know what the portfolio is holding.
The concept of interest rate hedged securities is relatively new and untried.
But if you find the right product, you can earn more than in traditional bonds., These do not promise a specific interest rate but fluctuate with the changes in the market.
Your hope is that as interest rates rise, these stocks will also pay higher dividends.
There are two main types of variable rate securities:
Investment-grade floating rate securities.
These are investments in companies with high credit ratings.
Interest payments on these securities are reset periodically, so as interest rates rise, then your payoff is expected to increase as well.
Bank loan securities.
You are investing in bank loans that carry lower-grade ratings.
As a result, the interest payments tend to go up, but so does your risk.
Bank loans carry a risk of loss if borrowers default.
But the payoff may be worthwhile. , Inverse funds are those products that tend to increase in value as interest rates rise.
However, the risk is much higher than any of the other means discussed.
You should be aware of your investments or work with an experienced broker or financial adviser if you wish to go this route.
Inverse funds tend to fluctuate quickly.
You run the risk of buying at a peak and selling low, thereby losing money.
Timing is more important with this type of investment than any of the others.
About the Author
Kyle Torres
Professional writer focused on creating easy-to-follow pet care tutorials.
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