How to prepare your portfolio as interest rates continue to rise

After almost eight months of market volatility, many investors are still concerned about rising interest rates and how these changes will affect their portfolios.

About 88% of investors are concerned about rising inflation and rising interest rates, according to a JP Morgan Wealth Management study of more than 2,000 Americans released Monday.

The Federal Reserve issued its second consecutive three-quarters-point rate hike in July to fight rising prices without triggering a recession. And meeting minutes suggest the Fed will not hesitate to make further rate hikes until inflation eases.

More from the Investor Toolkit:
Investors flock to green energy funds as Congress passes climate bill
What the new 1% tax on share buybacks means for your portfolio
Exchange-traded individual funds are “far too risky for 99% of investors,” says the advisor

As annual inflation rose 8.5% in July, more slowly than in June, eyes are on Fed Chair Jerome Powell as he prepares to address colleagues this week in Jackson Hole, Wyoming.

With many more rate hikes expected at the Fed’s fall meetings, advisors have revised their portfolio recommendations as follows.

In the face of rising interest rates, Kyle Newell, an Orlando, Florida-based certified financial planner and owner of Newell Wealth Management, has made some adjustments to client portfolios.

For now, he’s opting for value stocks, which typically trade for less than the asset’s worth, versus growth stocks, which are widely expected to offer above-average returns. Typically, value investors look for bargains: undervalued companies that are expected to rise over time.

“Generally speaking, as the cost of doing business increases, the growth company does more harm,” Newell said, explaining that “a lot of the value is based on future projections.”

Because market interest rates and bond prices move in opposite directions — meaning higher interest rates lead to falling values ​​– Newell has also been proactive in allocating bonds.

When building a bond portfolio, advisors consider duration, which measures a bond’s sensitivity to changes in interest rates. Expressed in years, the duration takes into account the coupon, the time to maturity and the yield paid during the term.

Typically, the longer a bond’s duration, the more sensitive it is to interest rate increases and the more its price will fall.

“I would want to stay on the shorter end,” Newell said, explaining how a larger portfolio of single bonds or fixed-maturity exchange-traded funds might offer more control.

Still, it’s impossible to predict exactly what will happen to inflation, the Fed, or the stock market, so having a well-diversified portfolio based on your risk tolerance and goals is crucial.

“That’s the most important thing I want people to remember,” Newell added.