As interest rates rise, it is more important than ever to be prepared.
There’s a myriad of things that can happen when interest rates go up, and not all of them are good. Your mortgage payments could go up, your credit card payments could become more expensive, and it could become more difficult to save money.
Likewise, there’s also a great number of things you can do to prepare for rising interest rates, many of which you might hear like:
- Reviewing your budget and make adjustments
- Prioritizing your debts
- Moving your investments to high-yield savings accounts
- Considering a fixed rate mortgage
One that you might not hear as much or think to be as effective, but can be, is to switch up your stock investing strategy.
In this post, we will discuss how, and go through a few tips on how to get started.
When Interest Rates Rise, Stocks Tend To Fall Down
Let’s begin with what happens with stocks when interest rates rise.
In general, when interest rates go up, stock prices tend to fall.
This is for a variety of reasons, but one of the most basic explanations is that as rates increase, the cost of borrowing money becomes more expensive, which makes it more difficult for companies to borrow money to expand their operations. This can lead to a decrease in company growth, which often leads to a decline investor confidence and therefore stock prices.
On top of that – because of the higher interest rates, many novice investors will choose to move their investments from stocks into safer, lower-risk investments, such as bonds or high-yield savings accounts, which might not offer the same returns, but can give greater peace of mind.
This is the easiest way to prepare your portfolio for when interest rates rise if you’re inexperienced as an investor. However, if you’re looking to grow your wealth and not just protect it, then you’ll need to be a bit more strategic.
This Is How You Can Prepare For Rising Interest Rates Using Stocks
If you’re already investing in stocks, what can you do to prepare for rising interest rates?
Here are a few tips:
1. Review your current portfolio and make sure you’re diversified
When interest rates rise, it’s not just stocks that can be affected – all investments can be impacted. This is why it’s important to review your current portfolio and make sure that you’re diversified.
Diversification is key to mitigating risk in any portfolio, but it becomes even more important when there are potential changes on the horizon. By diversifying your investments – whether that’s through different sectors of the stock market or through different asset classes, you can feel confident that your portfolio will stay intact.
2. Consider switching to dividend stocks
Dividend stocks tend to be more resilient to changes in interest rates than other types of stocks. This is because they offer a consistent income stream that is not as reliant on company growth.
3. Look for opportunities in sectors that benefit from rising interest rates
While rising interest rates can have a negative impact on many sectors, there are some sectors that actually benefit from higher rates. These include companies in the financial sector and companies that provide services to businesses (we’ll talk more about that later in this post).
4. Review your investment timeline and make adjustments if necessary
If you have a longer-term investment horizon, then you may not need to make any changes to your portfolio in preparation for rising interest rates. However, if you’re closer to retirement or have a shorter time frame, then you may want to consider making some adjustments.
For example, if you’re nearing retirement, you may want to start shifting some of your investments into more conservative assets, such as bonds or high-yield savings accounts. This will help protect your nest egg from potential market volatility.
5. Speak with a financial advisor
If you’re unsure about how to prepare your portfolio for rising interest rates, the best thing you can do is speak with an experienced financial advisor. They will be able to help you assess your individual situation and make recommendations based on your goals and risk tolerance.
6. Keep an Eye on the Overall Market Conditions
It’s also important to pay attention to the overall market conditions and make sure you’re not buying stocks just because they’re doing well in a rising interest rate environment.
For example, if the stock market is overall struggling and you’re only investing in stocks that do well in a rising interest rate environment, then you could still end up losing money.
The Stock Sectors That Benefit Most From Rising Interest Rates
If done correctly, stocks can provide stability and growth potential that can help you weather any storm – even when interest rates rise.
For me, the best way to take advantage of rising interest rates is by investing in stocks that tend to do well in this environment.
Some examples of these types of stocks include:
- Consumer Staples: These are stocks of companies that make products that people need on a regular basis, such as food and household goods. Again, people will continue to buy these products even if interest rates go up, making consumer staples a good choice in a rising rate environment.
- Healthcare: Healthcare stocks tend to do well in a rising interest rate environment because healthcare costs always go up, regardless of what the interest rates are.
- Utilities: These are stocks of companies that provide essential services, such as water and electricity. Because people will continue to need these services no matter what the interest rates are, utilities tend to be relatively stable in a rising interest rate environment. When rates rise, investors flock to these types of stocks in search of stability and income.
- Banks: Banks are one of the biggest beneficiaries of rising interest rates. This is because they make money off of the spread between what they charge for loans and what they pay for deposits. As interest rates rise, so does the margin between these two numbers, and thus, bank profits. This is why bank stocks tend to do well when interest rates go up.
- Insurance Companies: Higher interest rates also tend to be good for insurance companies. This is because many insurance companies invest premiums in bonds. When rates go up, the value of these bonds goes down, which hurts the company’s bottom line. However, over time, as rates continue to rise, the value of these bonds will rebound and the company will start to see profits again.
- Real Estate Investment Trusts (REITs): a REIT is a company that owns, operates or finances income-producing real estate. Because these companies are invested in real estate, they are not as affected by rising interest rates as other types of stocks. In fact, REITs often do well in a rising interest rate environment as people look for investments that will provide them with stable income. If you’re interested in learning more about REITs, I talk about it here in greater detail.
- Dividend Stocks: Dividend stocks are a good choice in a rising interest rate environment because they provide a source of income that can help offset any losses in the stock portfolio.
Of course, there are other factors to consider when choosing stocks, such as the overall market conditions and the specific company’s financial situation. But if you’re looking for stocks that tend to do well in a rising interest rate environment, these are some good options to consider.
If you’d like to learn a little more about how different sectors of the stock market are affected by changing interest rates, check out my post about that here.
The Bottom Line
Rising interest rates can have a negative impact on your portfolio, but if you’re prepared and know which stocks to invest in, you can actually take advantage of the situation. Just be sure to do your research before making any decisions.
If you’re new to this and would like some help with understanding how to invest in stocks, I suggest checking out a couple of resources:
- The first is my FREE 10 Stock Criteria Checklist, which helps you identify what I consider to be the financially strongest 1% of stocks in the market at any time in less than 5 minutes. Click here to learn more.
- The second is my FREE 90-Minute Online Masterclass, where I’ll show you how I personally anticipate market crashes in advance and prepare for them. Click here to learn more if you’re interested.
Hope to see you on the other side 🙂