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After nearly eight months of market volatility, many investors still worry about rising interest rates and how those changes affect their portfolio.
Some 88% of investors are concerned about rising inflation and interest rates, according to a J.P. Morgan Wealth Management study published Monday, polling more than 2,000 Americans, with oversamples of Black and Hispanic investors.
The Federal Reserve in July enacted its second consecutive three-quarters of a percentage point interest rate hike, aiming to fight soaring prices without triggering a recession. And meeting minutes suggest the Fed won’t hesitate to make further hikes until inflation subsides.
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While annual inflation rose by 8.5% in July, a slower pace than June, eyes are on Fed Chair Jerome Powell as he prepares to address colleagues this week in Jackson Hole, Wyoming.
With many expecting additional interest rate hikes at the Fed’s fall meetings, here’s how advisors have shifted their portfolio recommendations.
Consider value over growth stocks
As interest rates rise, Kyle Newell, an Orlando, Florida-based certified financial planner and owner of Newell Wealth Management, has made some adjustments to client portfolios.
Right now, he’s opting for value stocks, which typically trade for less than the asset is worth, over growth stocks, that are generally expected to provide above-average returns. Typically, value investors are looking for bargains: undervalued companies expected to appreciate over time.
“If the cost of doing business is rising, that generally hurts growth companies more,” said Newell, explaining how “a lot of the value is based on future projections.”
If the cost of doing business is rising, that generally hurts growth companies more.
Kyle Newell
owner of Newell Wealth Management
Opt for shorter bond maturities
Since market interest rates and bond prices move in opposite directions — meaning higher rates make values fall — Newell has also been proactive with bond allocations.
When building a bond portfolio, advisors consider so-called duration, measuring a bond’s sensitivity to interest rate changes. Expressed in years, duration factors in the coupon, time to maturity and yield paid through the term.
Typically, the longer a bond’s duration, the more sensitive it will be to interest rate hikes, and the more its price will decline.
“I would want to stay on the shorter end,” said Newell, explaining how a larger portfolio with individual bonds or defined-maturity exchange-traded funds may offer more control.
Still, it’s impossible to predict exactly what will happen with inflation, the Fed or the stock market, so it’s critical to have a well-diversified portfolio based on your risk tolerance and goals.
“That’s the main thing that I want people to remember,” Newell added.
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