Should Fed rate hikes affect your investment strategy?

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In March, the Federal Reserve raised rates for the first time since 2018 and signaled that more rate hikes could come. These hikes can affect your personal finances in several ways: interest rates on your credit cards and new lines of credit are likely to increase, and on the positive side, your savings and CD rates may increase.

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Rate hikes also affect how some people invest. A recent survey conducted by a global asset manager Hartford Fund found that more than half of investors (55%) plan to make changes when the Fed raises rates — but is it really necessary? And if so, what adjustments should investors make?

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 Fed hikes, you probably don’t need to.

“While it may make 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 large allocations based on rates,” fixed Joe Boyle said. director of income products at Hartford Funds. “Predicting rate movements, whether up or down, has proven extremely difficult, and even seasoned investment professionals can be caught off guard. Additionally, the market moves so quickly that rate moves are often quickly priced in, and investors can constantly find themselves playing catch-up.

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When changes to your strategy might make sense

While it’s generally best to maintain your portfolio during rate hikes, it really depends on your personal circumstances.

“It really depends on where you are on the investment 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 into this horizon, we believe it is important to control the amount allocated to more interest rate sensitive assets. It’s not just about long-duration bonds, because the stocks that serve as a bond indicator – for example, utilities, telecoms, commodities – and growth stocks whose valuations are sensitive to higher discount rates are also sensitive areas of the market.

Boyle also said to keep in mind that interest rate hikes can have a positive impact on your investments.

“Rate hikes don’t have to be completely negative,” he said. “Historically, they have been an advantage to other asset classes. Leveraged loans would benefit from higher income, and sector-specific areas could also benefit. [These include] financials who are energy/metals/mining/chemical commodity-related lenders or stocks to agriculture-related businesses, which have historically benefited from inflation.

What to do next

Before making changes to your portfolio based on anticipated rate increases, remember that these future rate increases are not a guarantee.

“We think investors should keep in mind that rate moves aren’t linear,” Boyle said. “Expectations are for continued upward movement, but that can change quickly. Any type of ‘risky’ event can quickly alter the trajectory. If possible, work with a finance professional to see what fits your plan, but overall, any rate play should be tactical at best.

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About the Author

Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Prior to joining the team, she was a staff writer-reporter for People Magazine and His work has also appeared on E! Online, Us Weekly, Patch, Sweety High, and Discover Los Angeles, and she’s been featured on “Good Morning America” ​​as a celebrity news expert.

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