How to Invest when Interest Rates Are Rising

With interest rising rates you need to think long and hard about what you are going to do with your money. Investing when interest rates are climbing is much different than investing when they are dropping, or holding steady. The way that you invest your money during these times will have a massive effect on your long term success. 

As interest rates begin to soar, there are some things that you should expect. History shows that stocks do not respond well when interest rates begin to increase. Rising interest rates can lead to a decline in the stock market. For this reason, if interest rates appear to be climbing you need to keep a close watch on how much money you have invested in individual stocks. Financial stocks are particularly affected by rising rates because their funding is tied directly to the market rates.

CDs, Money Market Accounts and Online Savings Accounts

When interest rates begin to rise you may once again have something to talk about in terms of CDs, money market accounts and online savings accounts. These types of investments tend to do well when rates are on the rise. In the past, these accounts were able to return five percent interest or better.

If you notice short term rates on the rise, you can expect interest rates attached to these types of accounts to follow suit. As an investor, you should be aware of this and then shift your money accordingly. With CDs, for example, you may be able to lock in a high long term rate. A CD laddering strategy can help you take full advantage of rising rates, without locking up too much of your money for the long haul. While it makes sense to invest when rates go up, you don’t want to tie up too much money in case they continue to climb.

Rising Rates, Falling Bond Prices

History has proved that when interest rates rise, bond prices fall. The reason for this is simple, new bonds will have a higher rate, which means those that were previously issued are bound to decline in value. Not all bonds are affected the same way. The longer the maturity the more value the bond is going to lose, if rates continue to increase. For example, a 10 year bond will lose more of its value than a five year bond. If you do not expect to sell your bonds, rising rates have no effect on you. However, if you are going to sell, you should be aware that the value may have declined and you will have to take a loss.

When interest rates are rising you may need to change your investment strategy to ensure that you are taking full advantage of the current economic conditions. Be sure to do plenty of research before you invest in any type of fund.

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