Rising interest rates are here again, with the Fed raising interest rates again on June 14 – an issue of concern to any investor with a portfolio, especially one geared to last through retirement. This is the third hike from the Federal Reserve  since the November 2016 elections, and it’s anticipated that one more rate hike will be scheduled for the remainder of 2017. The Fed is also expected to begin unwinding its balance sheet during the latter part of the year. 

For stock investors, rising rates have had a relatively muted effect. Already this year Standard and Poor’s 500 index, the Nasdaq​ and the Dow Jones Industrial Average have reported record highs. Looking forward, however, rising rates could make their impact more deeply felt if they trigger a market pullback

How Rising Interest Rates Could Affect Your Portfolio

Increases in the federal funds rate are designed to keep the economy balanced while minimizing speculation in the markets. The tradeoff is that borrowing becomes more expensive. But in a rising-interest-rate environment, companies that benefit from an uptick in consumer spending tend to see a trickle-down effect with regard to their stock performance. (For more, see The Impact of a Fed Interest Rate Hike.)

If rising rates were to curb consumer spending, however, that could shrink company profits, in turn affecting stock valuations. In that scenario, certain sectors may offer investors a stronger performance than others. The financials sector, for example, could continue to be lucrative for investors. Tech stocks, on the other hand, have wobbled slightly in recent days ahead of talk surrounding another Fed rate hike. 

Bond investors have seen a more immediate reaction to the recent rate hikes in their portfolios. Bond yields tend to have an inverse relationship with interest rates: When rates rise, yields drop. That presents both an opportunity and a disadvantage, in that investors may see losses in their current bond holdings but can reinvest at higher positive rates of return.

Minimizing the Impact of Rising Rates 

The market moves in cycles, and corrections are a natural part of the ebb and flow. With more interest-rate hikes on the horizon, a correction could some sooner rather than later, creating pressure on investors to prepare.

If you’re concerned about how rising rates might affect your investments, there are some things you can do now to mitigate the impacts of a correction, should one occur. First, take a second look at your dividend stock investments. Focus on investing in companies that consistently increase yields to investors and demonstrate strong cash flow positions.

Next, review your overall portfolio diversification. If you’ve concentrated a significant amount of assets in one or two sectors, for example, consider how well those sectors have performed historically during periods of rising rates. Likewise, if your portfolio is heavy on equities, adding some bonds could create insulation against downside risk.

If your stock holdings are largely limited to domestic stocks, you may want to think about expanding into foreign investments. Adding investments in European or emerging markets can increase diversification, making market volatility less stressful on your portfolio. Just be aware that as interest rates rise, it may become more difficult for foreign companies to service debts borrowed in U.S. currency. That could trigger an increase in default risk among those companies.

Finally, it’s important to be particularly mindful of what you’re paying in investment fees as rates rise. If stock and bond yields drop, minimizing the fees becomes critical for ensuring that you’re maintaining as much of your investment growth as possible. (For more, see When Interest Rates Rise: Best Investment Strategies.)

The Bottom Line

Additional rate hikes seem almost a certainty, although when the Fed will make a move remains unclear. In the meantime investors can benefit from understanding the potential risk that rising rates pose to their portfolios. This may require making adjustments to your investment strategy, but it may be worth it if you’re able to avoid significant losses in the event of a market correction.



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