Whenever interest rates rise, many investors especially retirees with large bond holdings, are worried. And most investors are reluctant to make any new investment moves. Of course, they have every reason to be worried or hesitant. Inflation can be very tough to contend with. And it’s a monster that eats up investment portfolios quickly.
Official interest rates are usually unreliable or even outright false at time, and this can downplay or underestimate the situation. So, you shouldn’t trust the numbers, as doing so might prompt you to take decisions that can make the value of your investments evaporate before your eyes.
Overestimating inflation, on the other, hand has negative consequences as well. Overestimating inflation hedges, or any hedge for that matter, can eat away at valuable yield, usually slowly (even if slowly, it’s bad). If you really want to succeed as an investor, you need to guard your existing investments against inflation, so it doesn’t crush your investment portfolio.
You also need to play your cards right with regards to new investments. This is not hard to do—It’s just a matter of knowing what to do and what to avoid when inflation rates rise. Having this knowledge is the only way to make well-informed investment decisions and hedge your portfolio against rising interest rates.
Fortunately, there are several proven strategies and techniques for investing smartly during periods of inflation. And here are six such strategies.
6 Profitable Ways to Invest as Interest Rates Rise (High Inflation)
1. Ditch high-income sectors
When making new investments at times of increasing interest rates, you must avoid the beloved high-income sectors—such as utilities and telecommunications—like a plague. Why? The reason is because earnings in those sectors tend to reduce drastically as the economy recovers. Instead, you should invest in sectors in which companies can increase earnings more quickly as the economy picks up.
As for commodities, they can suffer as interest rates rise, and can be a tricky bet. Home values haven’t been as hurt by higher mortgage rates as you might think.
2. Avoid Treasuries and mortgage bonds
In fixed income, you should stay away from Treasuries and mortgage bonds because these securities are most directly affected by the end of the any special program designed to juice the economy, such as the Federal Reserve asset-buying program. Instead, it is advisable that you invest in deals among municipal bonds that have been punished by default fears. You might be tempted to load up on short-term debt, though. Resist that temptation.
3. Invest in economically sensitive sectors
Another smart way to invest during period of high interest rates is to look towards economically sensitive sectors, such as consumer-discretionary companies (which sell items such as automobiles), energy, and financial stocks. Aside having the potential to provide good profit even in periods on inflation, such sectors also have the added advantage of being relatively cheap to invest in.
4. Feel free to invest in homes and related property
Although rising interest rates will lead to higher mortgage prices, that doesn’t necessarily cause home prices to drop. Historically, there has been very little relationship between mortgage rates and home prices, all other things being equal. So, a period of increasing interest rates is still a decent time to buy a home, especially for buyers with good credit.
Retail, specifically discount retailers and those that sell life’s little necessities, tend to hold their own even in the face of increased interest rates. And the rationale is obvious: during inflation, people will flock to those who offer discounts to stretch their shopping dollar.
Costo Wholesale Corporation, for example, represents a good value to investors who want to invest during inflation and grab shares of a company that bucks the unsavory trend of taxpayer-subsidized profits. Aside that the company has an attractive EPS (around $4.54), you can sleep easy knowing that Costco pays its employees a fair wage, relieving pressures on the economy.
Gold is a fantastic store of value. As an investment, it suits a wide range of goals and philosophies. Some people regard gold as the ultimate hedge against inflation and other economic threats to investment. Although there is growing consensus about the relative value of gold as a hedge against inflation, it should be part of your strategy for investing as interest rates rise.
Investing in gold is becoming easier by the day, as more and more options are now available for investing in the precious yellow metal—you can invest in gold bullion, gold jewelry, gold mutual funds, closed-end funds, and gold options or futures.