The advice from financial pros: Don’t panic over Fed hike
Investment returns hinge on many factors beyond rate increase
NEW YORK, Dec 17, (AP): Richard Jones, a wealth adviser in Los Angeles, has one word for clients who worry about the potential impact of the Federal Reserve’s first interest-rate increase in nine years:
“We’re telling clients not to panic, not to be overly concerned,” said Jones, a managing director with Merrill Lynch Private Banking. “Remember your basic goals and objectives.”
It’s a message he and other advisers have sent clients in the months leading to the Fed’s move Wednesday to raise its benchmark rate from a record low near zero. Financial pros have been counseling clients that returns on stocks, bonds and other investments aren’t necessarily destined to suffer because of a modest Fed hike.
Investment returns hinge on many factors beyond a Fed rate increase — especially because the Fed stressed that its pace of increases will be gradual and that rates will likely stay historically low in the near future.
For potential home buyers, advisers say mortgage rates aren’t necessarily likely to rise. Long-term mortgage rates tend to track the yields on 10-year Treasury notes, which should stay relatively low as long as inflation does.
“The Fed has promised to take it slow with the rate hikes, which should help to give consumers buying houses, cars and things to put in their houses and cars plenty of time to make decisions,” said John Canally, chief economic strategist for LPL Financial, an independent broker-dealer in Boston.
Here’s a sampling of what financial planners and investment advisers have been telling clients to do in the face of rising interest rates:
Stay diversified
A well-diversified portfolio of longterm investments should manage to withstand any short-term consequences of a series of slow and modest Fed rate hikes. Most important is for investors with a diversified portfolio and a prudent strategy to stay on track with their long-term goals.
“Unless a portfolio does not reflect an investor’s true goals (and) risk tolerances or is not appropriately diversified in the first place, I tend to think that most investors should resist the urge to overreact,” said Bruce Colin, a certified financial planner in Rancho Palos Verdes, California.
Review bond holdings
Jones tells clients to assess their bond portfolio with an eye toward minimizing risk. Should the Fed hike lead to steadily higher rates on certain categories of bonds — which may or may not happen — longer-term bonds, in particular, would lose value over time. Investors should be wary of owning too many bonds that mature more than 10 years out.
“Because if you do have rising interest rates, you’re going to see the value of those portfolios go down dramatically,” Jones said.
He suggests that investors ensure that the average maturity of the bonds in their fixed-income portfolios remain between four and five years.
“If the average maturity of the bonds is shorter, what that means is when those bonds mature, if we’re in a rising interest rate environment, then they can reinvest at a higher rate,” Jones said.
Don’t go too short, though. Though you’ll lower your risk, you’ll also unduly limit your potential returns.
Jones also advises clients not to acquire bonds classified as “junk.” These are bonds issued by companies that might be unable to repay investors in case of an economic downturn.
Consider stocks over bonds
Because of bonds’ potentially greater risk exposure to rising rates, Erik Wytenus, global investment specialist with J.P. Morgan, tells clients to shift more of their portfolio from fixed-income investments, like bonds, to US stocks.
“Even if you don’t get the timing exactly right, it’s important to not be too heavily allocated to fixed-income (investments),” he said.
Wytenus sees the state of the US economy as a big positive for US stocks. He points to solid consumer confidence, low inflation, rising job openings and strong auto sales.
“Everything in economic history also suggests that when the Fed starts to hike rates, it is not typically the type of thing that causes a major market downturn or causes a recessionary type of condition,” Wytenus said.
Seek dividends
Rising interest rates could heighten volatility in the stock market. One way to hedge against that trend is to buy shares in companies with records of increasing shareholder dividends. These tend to be those with strong earnings and cash flow.
“Focus more on credit quality in the equity market,” Jones said. “In volatile markets, this is another good source of stable income — getting these dividends.”
Keep CDs short-term
David Mullins, a certified financial planner in Richlands, Virginia, is telling fixed-income clients to avoid placing too big a portion of their money into a certificate of deposit with a high rate but a long maturity date. Being locked into a longterm CD could backfire if rates kept rising.
Instead, he suggests a strategy known as “laddering.” It involves spreading money across several CDs that pay off at different times. If rates rise, an investor can take advantage of higher rates once the next CD matures.
Mullins suggests putting 20 percent into each of five laddered CDs that pay off between one to five years.
“Because you have money coming due each year, you will be better-positioned to take advantage of the higher rates without having to take a penalty,” he said.
Don’t fret about mortgage rates
The Fed controls very short-term rates. Long-term rates, like those used in 30year fixed-rate home loans, aren’t influenced much by the Fed.
Mortgage rates mostly track rates on long-term Treasurys, which investors have been snapping up. Such demand has helped keep those rates low.