How to Prepare for Rising Interest Rates: Things You Should Do

Over the recent years, every expert we talked to said that interest rates would go up. After years of record-low rates, the BoC (Bank of Canada) has started to raise them. In July, the rate went from 0.5 percent to 0.75 percent. This was the first time it went up. This was the first increase in seven years, and it was due to "bolstered" confidence that the Canadian economy had gotten out of a slow growth period. Right now, neither variable rates nor fixed rates look like they will go down. Interest rates may keep rising, but it's essential to ask: Is this a one-time thing, or is it a trend? Just wait and see. In the meantime, it might be wise to prepare for rate hikes this year and through 2023.

Cut Bond Duration

Investors should do everything possible to reduce their exposure to long-term bonds and increase their exposure to short-term and medium-term bonds. Short-term and medium-term bonds are less affected by rate increases than long-term bonds, which lock in rising rates for longer periods. But switching to a shorter-term bond model with a lower yield comes with a cost: short-term bonds have less potential to make money than longer-term bonds. Combining short-term bonds with other forms of debt, such as variable-rate bank loans and TIPS (Treasury Inflation-Protected Securities), whose variable interest rate is less influenced by increasing interest rates than fixed-rate instruments, is one solution to this issue. Most of the time, inflation danger perks have been up in the past. Suppose future interest rates rise as a result of rising inflation, and inflation risk is suddenly factored in again.

Use Bond Ladders

The bond ladder is, of course, a method that financial planners and investment consultants often recommend to their customers. A bond ladder is a group of bonds that all mature simultaneously, like every three, six, nine, or 12 months. When interest rates rise, these bonds are re-invested at the new, higher rate. The exact process works for CD laddering. This procedure is shown in the following example: Larry has $300,000 in a money market account with an interest rate of less than 1%. His broker says that it's likely that interest rates will go up in the next few months. He transfers $249,999 from his money market account into five $49,999 CDs that will mature every 90 days beginning in three months. Larry replaces the CD that is ready to expire with a new CD that pays a greater interest rate every 90 days.

Beware of Inflation Hedges

Precious metals like gold tend to do fine when high inflation and low rates. When interest rates start to go up, it's not suitable for investments that try to protect against inflation. This is because inflation tends to slow down when interest rates go up. Prices of other natural resources, like oil, may also reach a high-interest environment. This is bad news for people who put money directly into them. Investors might want to sell at least some of these instruments and put the money into the stocks of companies that use them.

Reduce Your Risk

Even safe investments will start to pay more when interest rates go up. Also, when rates go up, the prices of high-yield offerings will fall much more than those of government or municipal issues. So, the risks of high-yield instruments may eventually cancel out the higher returns they offer compared to low-risk options.

Refinance Your Home

Just as it is wise to save your fixed-earnings group liquid, it is smart to lock in your home loan rate before it rises. Now might be an excellent time to refinance your home if you can. Also, work on your credit score, pay off any small debts, and talk to your bank or a loan officer. A low-risk way to make sure money is to lock in a mortgage at 5% and then get an average yield of 6.5% on your bond ladder. It's also a good idea to lock in low rates on your car loan and other long-term debt.

The Bottom Line

When planning your investment strategy as an investor, you should consider several things. It would be best if you also thought about interest rates, even though they might not seem as important. They have an impact not only on the cost of borrowing money but also on the performance of your assets. Investing with interest rates will help you earn a greater return on your money if you follow the advice above.