Many investors are still concerned about rising interest rates and how those changes may effect their portfolios after over eight months of market turbulence.
According to a J.P. Morgan Wealth Management report released on Monday, which surveyed more than 2,000 Americans, with oversamples of Black and Hispanic investors, 88% of investors are concerned about rising inflation and interest rates.
In an effort to combat rising prices without starting a recession, the Federal Reserve raised interest rates in July for the second time in a row, by three-quarters of a percentage point. Additionally, according to meeting minutes, the Fed will likely continue raising rates until inflation starts to decline.
Eyes are on Fed Chair Jerome Powell as he gets ready to address colleagues this week in Jackson Hole, Wyoming, despite the fact that annual inflation increased by 8.5% in July at a slower rate than it did in June.
Here is how advisors have changed their portfolio advice in light of the widespread expectation that the Fed will raise interest rates again at its September meetings.
Value equities should be prioritized over growth stocks
Kyle Newell, a licensed financial planner and the founder of Newell Wealth Management in Orlando, Florida, has modified client portfolios in response to rising interest rates.
He is currently choosing value stocks over growth stocks, which are often predicted to offer returns above average, because they typically trade for less than the asset is worth. Value investors typically look for bargains: undervalued businesses predicted to rise in value over time.
“If the cost of doing business is rising, that generally hurts growth companies more,” stated Newell as he described how “a lot of the value is based on future projections.”
Select bonds with shorter maturities
Newell has also taken initiative with bond allocations because market interest rates and bond prices move in opposite directions—higher rates cause values to decline.
Advisors take into account “duration,” which measures a bond’s sensitivity to interest rate movements, while constructing a bond portfolio. Duration, which is expressed in years, considers the coupon, the remaining period till maturity, and the yield received.
Generally speaking, the longer the duration of a bond, the more price sensitivity it will have to interest rate increases.
“I would want to stay on the shorter end,” Newell outlined how a larger portfolio of individual bonds or exchange-traded funds with set maturities may provide additional control.
The stock market, the Fed, and inflation are all difficult to predict with any degree of certainty, so it’s essential to maintain a well-diversified portfolio based on your objectives and risk tolerance.
“That’s the main thing that I want people to remember,” Newell added.