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Home Investment NewsInvestment Strategies As interest rates soar, here are three investment strategies to consider

As interest rates soar, here are three investment strategies to consider

by xyonent
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The US Federal Reserve has raised short-term interest rates from effectively zero at the start of 2022 to just over 5% now. This is one of the most rapid changes in history, meaning the opportunities for low-risk returns on cash investments have increased significantly. Considering your investment strategy to take rising interest rates into account could improve the returns on your cash holdings in the current environment, especially if you haven’t done so since last year when interest rates were generally low.

Find better interest rates from banks

The most obvious is that many banks are now offering interest rates of over 4% on savings accounts to attract new customers, but you may have to shop around to get these rates.

Here is a list of banks currently offering high interest savings: hereJust because interest rates have risen doesn’t mean banks will raise the interest rate on your savings account all the way up to market rates, so it may be worth shopping around to get the best interest rate on your cash savings. Many of these products are offered online, and the process for opening an account is relatively simple.

Consider short-term government bond ETFs

Rising interest rates are reflected in the yields on short-term government bond investments, which are generally considered low-risk investments in the market, and if you have excess cash in your brokerage account, holding these could increase your income depending on how you invest the cash.

The US yield curve is currently inverted, which means that short term bonds are earning higher returns than long term bonds. This means you get a higher yield and are not as vulnerable to fluctuations in interest rates. If interest rates rise from here, the value of long term bonds could fall, but if interest rates fall, long term bond investments will be profitable and many are hoping that will eventually happen.

There are many exchange traded funds (ETFs) that hold shorter-term U.S. Treasury securities. The Vanguard Short-Term Treasury Bond ETF is one example, with a relatively low expense ratio, $22 billion in assets, and the ticker VGSH. Vanguard has a strong reputation in the fund management industry for being investor-friendly. A second option is the Schwab Short-Term U.S. Treasury Bond ETF, with an expense ratio of 0.03%, $14 billion in assets, and the ticker SCHO. These ETFs can be purchased just like stocks and can earn you an estimated yield of over 4% today, but unlike a bank account, these ETFs do carry some risk if interest rates change in the future. However, because the bonds they hold have a low duration, they may have less interest rate risk than longer-duration bonds that mature further out.

Evaluate the stock and bond allocations in your portfolio

Yields have been very low in recent years, making it more difficult to include government bonds in a portfolio because yields have been low both relative to history and relative to expected returns on equities. However, this is changing as interest rates rise and fixed income investments can potentially earn 4% or more depending on how the bond market performs.

This means that bonds are becoming a more attractive option than stocks in a portfolio. For example, simply put, the S&P 500 has a dividend yield of just over 1.5%, but some bond investments are now offering much higher yields.

Of course, comparing yields isn’t a direct comparison, as stocks may also benefit from other factors such as earnings growth and share buybacks, but if you’re concerned about the relatively high valuations of U.S. stocks today and the potential risks to stocks in the near term, it may be wise to increase your exposure to bonds.

History also suggests that holding both stocks and bonds in tandem can stabilize returns over the long term. If history is any guide to the future, that’s because high-quality bonds can often provide some stability during downturns when stocks can get squeezed.

Final thoughts

The Fed’s rate hikes over the past 18 months have been so rapid that it makes sense to reassess your investment strategy. Fixed income investments generally offer higher yields than previously available. That said, cash and short-term bonds are certainly offering better yields than they have in the past, although much depends on how interest rates and the economy perform going forward.

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