Rising Federal Interest Rates: Seven Steps You Can Take to Protect Your Investments

Over the past 30 years, interest rates have been on a downward trend. The Federal Funds Rate, a key influencer of interest rates in the U.S. economy, hovered around 8.75% in December of 1988. Since that time, it has fallen significantly, with the rate dropping to a range of 0% to 0.25% in the wake of the Great Recession due to the Federal Reserve’s efforts to stimulate spending in a diminished economy.

All of that is about to change.

This past December, the Federal Reserve (Fed) raised the rate to 0.75%, citing a strengthening economy. For the last several years, the Fed has been carefully warning investors about rising rates. So when will the increased rates come? Nobody knows for certain. Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, signaled the possibility of another hike in March during her speech on Capitol Hill. This would be the third hike since December of 2015 when the Fed increased the rate’s range to 0.25% to 0.50% after nearly a decade of stagnation at 0.0% to 0.25%.

If rates do continue to rise, what will this mean for you?

First, let’s look at what a low rate over the past decades has meant: Lower rates have encouraged borrowing for mortgage loans, auto loans, home equity loans, business loans, credit cards, student loans, and more. This has helped give individuals more cash flow while decreasing the cost of their debts, or interest expense paid to their bank or financial institutions.

Lower interest rates are ideal for individuals at the beginning and mid-point of their investment life, but it’s not great for those in the latter years who need to plan for retirement income. Savings and short-term cash have been very low: after inflation, it has actually been a losing return option for most investors. This has had a major impact on low-risk investors and seniors on a lower income that rely on CDs, savings, and short-term high-quality bonds. 

Why Raise Rates?

While the Federal Reserve can decide to raise rates for many reasons, they are primarily trying to make sure that the economy is growing at a healthy rate and that the cost of living or the inflation rate does not start to grow out of control.  This can have a damaging effect on an economy as the value of your money is quickly deteriorating. Employees or retirees on a fixed income can feel the effects more significantly in a rising rate environment. As an investor, what can you do when interest rates start to rise?

Here are seven steps you can take to ensure that your investments will be protected and optimized in a rising rate environment:

1. Be sure that the bonds you own are short to intermediate term maturities. This means they will be less affected by rising rates.
2. Invest in other types of bonds that are not as interest rate sensitive, such as TIPs, High Yield Bonds, Global Fixed income, and money funds.
3. Invest in a strategic income fund that has a fixed income manager and research team working on buying the best bonds for the time and monitoring the effects of interest rates.
4. Invest in annuities with income guarantees that help with your income goal, while investing in a portfolio allocation that matches your risk.
5. Invest in fixed annuities with an adjusting interest rate and no market value adjustment.
6. Invest in equities and stocks with high dividends, growth, and income funds.
7. Hedge or offset your risk with funds that will increase in value if interest rates rise.

Get The Right Financial Advice. Rising interest rates mean it’s time to re-assess your investment strategy, especially if you are a mature investor. The best way to do this is to have a qualified financial professional review your portfolio and make specific suggestions to you and your family. At Richard Brothers, we can help you obtain a balanced portfolio that works over time to grow your wealth and protect your valuable principal.  We can also identify what rate of return you need to reach your long-term financial goals. Finally, we can review the progress of your investments annually and make adjustments if your financial situation, goals or risk level changes.

Need more insight into how rising rates could impact your financial future? Contact a Richard Brothers Financial Professional now at 207-879-2352.

Are you wondering if you are saving enough money for retirement? Check out this calculator to see if you are on the right track.