The Federal Reserve has signaled its desire to raise interest rates. In this video, I’ll consider whether you need to take any steps to prepare for higher interest rates.
There are three primary areas of your financial life to review in preparation for higher rates on the way: stocks, bonds, and debt. Let’s look at each.
Stocks
The one thing to certainly NOT do in the stock market is sell everything because you were told to “never fight the Fed” because higher rates are bad for stocks.
In the three months after John Hussman’s stock-market warning shown in the video, the S&P 500 gained 6%, a very strong showing, and now pundits are saying that the Fed’s desire to raise rates is a vote of confidence in the economy, and therefore good for stocks.
As usual, nobody has a clue in this department. If you actively manage your stock portfolio, sector allocation can make sense to move your money where rising rates should help. Financials do well when rates rise because their profits go up. Just look at the Financial Select Sector SPDR (XLF) over the past few months.
Finance is not alone. The classic five defensive sectors were covered by the Financial Times a year ago, and they still apply.
We thrive on changing prices, not constant up or down.
Bonds
If you actively manage a bond portfolio, consider laddering. What’s a bond ladder? Here to answer that is Neighborly, the municipal bond broker. From Neighborly.com: [Story and image shown in the video, at 6:33.] If you use a general bond fund in conjunction with a stock fund, the way my Signal system does, then just stay put.
As rates rise, bond prices drop. But most of a bond fund’s profit is from payouts, not price change, so eventually the higher rates offset the price drop.
Plus, my system moves money back and forth between the stock and bond funds, enabling benefit from moving prices on both sides of the equation.
