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After nearly eight months of market volatility, many investors are still worried about rising interest rates and how these changes will affect their portfolios.
Some 88% of investors are worried about rising inflation and interest rates, according to a report by JP Morgan Wealth Management study released Monday, surveying more than 2,000 Americans, with oversamples of black and Hispanic investors.
The Federal Reserve passed its second consecutive executive order in July. interest rate hike of three quarters of a percentage point, aimed at tackling soaring prices without triggering a recession. And the minutes of the meeting suggest the Fed will not hesitate to make further hikes until inflation subsides.
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As interest rates rise, Kyle Newell, an Orlando, Florida-based certified financial planner and owner of Newell Wealth Management, has made some adjustments to client portfolios.
Currently, he favors value stocks, which typically trade at a discount to asset value, over growth stocks, which are generally expected to offer above-average returns. Typically, value investors look for bargains: undervalued companies that are expected to appreciate over time.
“If the cost of doing business increases, it generally hurts growing businesses more,” Newell said, explaining how “much of the value is based on future projections.”
Since market interest rates and bond prices move in opposite directions — meaning higher rates drive values down — Newell has also been proactive with bond allocations.
When constructing a bond portfolio, advisors consider what is called duration, which measures a bond’s sensitivity to changes in interest rates. Expressed in years, the term takes into account the coupon, the term to maturity and the yield paid over the entire term.
As a general rule, the longer a bond’s duration, the more sensitive it will be to interest rate increases and the more its price will fall.
“I would like to stay short-term,” Newell said, explaining how a larger portfolio with individual bonds or fixed-maturity exchange-traded funds can provide more control.
Still, it’s impossible to predict exactly what will happen with inflation, the Fed, or the stock market, so having a well-diversified portfolio based on your risk tolerance and goals is essential.
“That’s the main thing I want people to remember,” Newell added.