Should the Fed’s Rate Hikes Affect Your Investment Strategy?
In March, the Federal Reserve raised rates for the first time since 2018 and indicated that more rate hikes could be coming. These hikes can affect your personal finances in a few ways — interest rates for your credit cards and new lines of credit are likely to increase, and on the plus side, your savings and CD rates may increase.
The rate hikes are also affecting how some people invest. A recent survey conducted by global asset manager Hartford Funds found that over half of investors (55%) plan to make changes when the Fed raises rates — but is this really necessary? And if so, what adjustments should investors be making?
In General, It’s Best To Stick With Your Long-Term Strategy
Although you may be tempted to make changes to your investment portfolio in response to the Fed’s hikes, you probably don’t need to.
“While it may make some sense to consider making certain tactical changes to a portfolio based on expected rate hikes, we believe investors should stick to their long-term investment goals rather than make any significant allocations based on rates,” said Joe Boyle, fixed income product manager at Hartford Funds. “Predicting rate movements, whether up or down, has proven extremely difficult to get consistently correct, and even seasoned investment professionals can be caught off-guard. Furthermore, the market moves so fast that rate moves are often quickly priced in, and investors may constantly find themselves playing catch-up.”
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When Changes to Your Strategy Might Make Sense
Although it’s generally best to maintain your portfolio throughout rate hikes, it really comes down to your individual circumstances.
“A lot depends on where you are on the investment timeline horizon (younger generation versus older generation), but we believe that every investor should have a plan in place that adjusts accordingly,” Boyle said. “However, as you move further along that horizon, we believe that it’s important to have a handle on the amount allocated to more interest-rate-sensitive assets. This is not long duration bonds only, as equities that serve as a bond proxy — e.g. utilities, telecom, staples — and growth stocks whose valuations are susceptible to higher discount rates are also sensitive areas of the market.”
Boyle also said to keep in mind that interest rate hikes can positively impact your investments.
“Rising rates do not have to be a complete negative,” he said. “Historically, they have been a benefit to other asset classes. Leveraged loans would be beneficiaries of higher income, and sector-specific areas may also have the potential to benefit. [These include] financials who are lenders or commodity-related equities from energy/metals/mining/chemicals to agricultural-related companies, which have historically benefitted from inflation.”
What To Do Next
Before you make any changes to your portfolio based on any anticipated rate hikes, remember that these future rate hikes are not a guarantee.
“We believe that investors should keep in mind that rate moves are not linear,” Boyle said. “Expectations are for continued upward movement, but that can change quickly. Any sort of ‘risk-off’ event can change the trajectory quickly. If possible, work with a financial professional to see what fits into your plan, but by and large, any play on rates should be tactical at best.”
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