Snowed-in? Ponder the Impact of an Interest Rate Increase on Your Portfolio
Change brings volatility to the NYSE, so might as well use these next two days to come up with a plan of action. Investopedia offers some advice:
For stock investors there are lots of ways to make money off a rate hike. After all there are some industries and areas that benefit from a rate hike more than others. From financial stocks to consumer-facing ones, here’s a look at five ways to make money in the stock market when interest rates are on the move. (See also: How Interest Rates Affect The Stock Market.)
Add Financial Stocks To Your Portfolio
If the Fed raises interest rates, that bodes well for many industries because it signals that the economy is picking up steam and corporate profits are on the rise. But one sector that tends to benefit the most from a rate hike is the financial industry. That’s because banks can charge more for lending when rates march higher. Even though savers get a bit of an increase in their interest rate from the banks, financial firms make a lot of cash by lending money and will welcome an increase in rates. Other financial firms that benefit from a rising interest rate environment include insurance companies and brokerage firms.
Short Duration Bonds
In order to have long-term appreciation, you are going to want to have a diversified investment portfolio that should include bonds, even in a rising interest rate environment. While bonds with long terms, say anything over five years, aren’t a smart investment in a rising interest rate environment, short-term duration bonds can keep you diversified and cushion the blow from any gyrations in the stock market. Rule of thumb in a period of rising rates: stay away from any bonds that have a duration of five or more years.
Consumer, Tech and Growth Stocks Should Do Well
The Federal Reserve isn’t going to raise interest rates if the economy is slackening, and an environment of rising interest rates usually means there’s good news for corporations around the country. After all if the economy is doing well, that means consumers have more discretionary spending and as a result are more willing to plunk down money on dining out, going on vacation, gambling in the casino or seeing movies more frequently. That in turn will lift the profits of consumer discretionary stocks and of the investors who invest in them. Same goes with growth stocks. A rise in rates is a nod to improving corporate profits. Growth stocks tend to do well at the end of cycle when the Fed is moving in. Even technology stocks can be a good place to park some money when rates are on an upward trend. Technology companies depend more on corporate spending than on consumer stocks. But if the economy is doing well, corporations, just like their consumer counterparts, will spend more. One area that will see more dollars is technology.
Hands-on Investors Can Play the Volatility
No one can predict for sure how the markets will react when rates rise, but one thing that is almost guaranteed is that there will be increased volatility. After all, if and when the Fed makes its move, it will be the first time since 2008. Any whisper of a rate increase over the past couple of years has had an impact on the stock market. But while volatility can conjure up fear and trepidation, active investors stand to benefit a lot. On days that stocks tank they can get good names for cheap, and when stocks are surging they can take some profit.
Read more: 5 Ways to Play the Stock Market after an Interest Rate Hike | Investopedia https://www.investopedia.com/articles/investing/111215/5-ways-play-stock-market-after-interest-rate-hike.asp#ixzz4bEy7BNNM
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