Interest rates are on the rise and
causing some serious stock market disruptions
in the process. You can sit back and fret about the turmoil -- or
you can look for opportunities to take advantage of it.
The key is anticipation. While there are no easy answers to
making money in a troubled market, you can think ahead to where you
want your portfolio to be when the dust settles and a more normal
investment environment resumes.
The challenges of rising interest rates
Treasury bond yields have risen sharply since the end of April,
and by the end of June had reached their highest level of the year.
In terms of the three primary asset classes of stocks, bonds and
cash, this has made for a very challenging environment:
Rising yields mean falling bond prices.
If the bond market perceives interest rates as heading higher, it
will trade bonds at lower prices so that the interest as a
percentage of the price adjusts to the anticipated rate. So,
rising interest rates directly drive bond prices lower.
Rising interest rates disrupt stocks.
Higher interest rates are bad for stocks because they can act as
a drag on economic growth, and because they create a higher
valuation hurdle for stocks. The stock market has seen some very
bumpy days over the past month as investors have tried to come to
grips with what higher interest rates will mean for stock
Savings account interest rates are not yet
Interest rates may be headed higher, but they are starting from a
very low level. To make matters worst, CD, savings and
money market rates
will probably be among the last things to react to higher rates,
as banks drag their feet to protect their profit margins.
Responding to rising interest rates
Given those challenges, what kinds of investment moves can you
make in a rising-interest-rate environment? Here are four things to
Rebalance your asset mix.
Low interest rates forced investors to take more risk in things
like stocks, since cash and bonds provided an inadequate return.
But once interest rates have moved higher, bonds in particular
should be more productive, and could deserve a larger portion of
your overall portfolio.
Upgrade your stocks.
Sudden downturns that hit stocks across the board can be a rare
opportunity to buy top-quality companies at reasonable prices. If
there are stocks you've always wanted to own but didn't like the
price, make a list now, because the months ahead might just see
some of them hit your target price.
Whether it's bonds or CDs, longer-term instruments typically
carry higher rates. You don't want to be long while rates are
first rising, but as they move higher, gradually start to
lengthen the maturities you own.
Shop for savings accounts.
Banks are going to react to the rising-interest-rate environment
at different times and to different degrees, so
don't expect bank rates to move higher in
. Shop for bank rates to make sure you are with a bank that is on
the leading edge of the trend.
Again, none of these moves will shield you from the disruptive
effects of rising interest rates. However, they will position you
to do better once rates stabilize.