Considering the fact that the fearless and reckless leader of our economy, Ben Bernanke, is going to have to raise interest rates at some point in the near future, investors must prepare how to react and shift their portfolios. Why will he raise rates? Simply because they are artificially low and the United States cannot slow down inflationary pressures, especially in oil and commodities. That diminishing purchasing power associated with the dollar & increasing prices are the ultimate reasons why rates must move upwards. How does the California investor protect his or her portfolio? Check out the following.
1. ETFs: These beautiful, Wall Street creations are low cost and tax efficient investment vehicles. They trade like stocks on an exchange and can hold a variety of different assets and investments within it. And the one ETF that can work against rising interest rates is PST, ProShares UltraShort 7-10 Year Treasury ETF. When the central bank approves an increase to rates, bond prices will decline. This makes new bonds more expensive than previously issued bonds. PST “shorts” Treasury bonds and doubles the movement. Therefore, if treasury bonds decreased by 1% in price, this ETF would increase by 2% for the investor. Be careful with PST because shorts that have multiples can pinch your pocket if movements go against you. But if you time it right in regards to rising rates and utilize an ETF, expect a pretty return to your portfolio.
2. Dividends: The market as a whole hates increases in interest rates because it is a tightening of our financial system. Bond investors, who enjoy that periodic interest payment, see their bonds decrease in value. Stocks react poorly, considering the increase in the cost of money increases corporate expenses lines. That is why dividend-paying stocks are excellent choices. They offer periodic payments of cash to investors and the opportunity for appreciation in stock price. A simple Google search for dividend-paying stocks should lead you in the right direction.
3. Go international: Do not feel tied to the American markets. Emerging markets and other foreign investments offer great opportunities that are not as impacted by changes in American monetary policy. Fearful of going abroad? Search for an ETF that tracks a large, foreign index, similar to what an S&P 500 ETF is for investors interested in U.S. markets. Thomas Friedman wrote a book many years back called, “The World is Flat”, indicating that markets and competitions are no longer divided by continental lines. Take his advice and take your portfolio global. Do research on foreign markets and let your portfolio reap the benefits of the high growth in those areas.
Rising interest rates can be a scary thing for the individual investor. And Ben Bernanke and his buddies know that the time will have to come eventually. By taking steps in protecting your portfolio, even the individual investor can beat the market and succeed in an increasing interest rate zone.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.