How Can Rising Interest Rates Impact Your Investments?
Posted On March 25, 2022
As interest rates begin to rise, investors should be prepared for dramatic shifts in the overall investing landscape
For the past several years, investors have been living in a world with historically low-interest rates. This has made the cost of borrowing extremely low and has created steady growing returns across equities. Now that interest rates are rising, things have changed. For the first time in a long time, investors are dealing with this new reality. Here is a look at how this new economy will potentially impact your investments.
1) Bond Prices Drop as Interest Rates Rise
When interest rates rise, the price of bonds tend to drop. Overall, long-term bonds are more affected. In many cases, people who have a bond-heavy portfolio will begin to diversify out into other investments because they will get a better rate of return elsewhere or they will lower the duration of their bond portfolios.
2) Cost of Borrowing Goes Up and Negatively Impacts Discretionary Stocks
When interest rates move higher, the cost to borrow money to purchase a house, a car, or other items becomes more expensive. That means that consumers will have less disposable income to spend on discretionary items. This, in turn, causes discretionary stocks to fall. Luxury stocks and companies that operate by selling high-margin products will be negatively impacted.
3) Cyclical Industries Outperform
When interest rates rise, you will tend to see outperformance from certain sectors . In particular, the financial, industrial, and energy sectors will replace tech and the discretionary sectors as the “hot spots”.
4) Diversification Becomes More Important
During times of low inflation, many people could get away with keeping the vast majority of their money in stocks. However, when interest rates rise, diversification becomes much more important. Therefore, a portfolio that holds assets across different classes – stocks, shorter term bonds, precious metals, and real estate – will tend to hold up better and experience less volatility.
Creating a Bulletproof Portfolio in a World of Rising Interest Rates
When interest rates rise, it is time to think differently. Diversifying into different asset classes will likely provide lower volatility and better returns. We’re here to help, contact us anytime to discuss further.
This information has been prepared by Joseph Alfie who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.