The Federal Reserve has raised the federal funds rate three times since December 2016, catching the attention of older investors. For them, rising rates could be a good thing.
“For years, the policy of lower interest rates has hurt seniors and savers,” so rising rates are a welcome change, says Josh Jalinski, president of Jalinski Advisory Group and CEO of Wealth Quarterback in Toms River, New Jersey.
With additional rate hikes likely, older investors should look for ways to capitalize on the trend.
Dividend stocks. Steering away from equities may be your natural inclination as retirement draws closer, but dividend stocks are worth reconsidering as rates rise, says Hunter Unschuld, a financial advisor with Fractal Profile Wealth Management in Albuquerque, New Mexico.
[See: The 10 Best Dividend Stocks of 2016.]
In a rising-rate environment, blue-chip stocks with dividend yields of 3.5 to 4 percent can offer older, conservative investors a positive return, Unschuld says.
Utilities stocks are another option.
If interest rates increase relatively quickly, utilities stocks don’t have the same potential for losses as a bond portfolio, but they’re very bond-like in their performance, Unschuld says.
That’s encouraging, but investors nearing retirement must still consider the risks of stock investing, relative to their time horizon.
Gary Zimmerman, CEO of MaxMyInterest, says investors whose portfolios track a specific index should pay close attention to interest rate-driven shifts in the market. He uses investors who have flocked to the Standard and Poor’s 500 index for income replacement as an example.
Zimmerman notes that exchange-traded funds tied to the index have been delivering dividend yields approaching 2 percent, along with capital appreciation during the current bull market. As rates rise, however, “the relative attractiveness of that dividend yield may diminish, and if rate increases cool the economy, stock prices could adjust accordingly.”
Unschuld believes the tipping point for stocks may come when interest rates rise above 3 percent. In that scenario, a diversified portfolio that is rebalanced regularly can help mitigate the effect of rising rates on stock prices.
Bonds. As interest rates rise, bond yields generally decline, but older investors shouldn’t discount them completely.
Guy LeBas, chief fixed income strategist at Philadelphia-based Janney Montgomery Scott, says having the right balance of income-generating investments is key when rates are climbing.
“With valuations in many U.S. markets steep right now, I advise a conservative stance that includes lower-volatility dividend-paying equities, investment-grade corporate bonds and investment-grade municipals for investors in higher tax brackets,” LeBas says.
He notes that if inflation rises, the dividend-paying stocks would likely perform well, but if stock valuations drop, investment-grade bonds could provide a cushion against losses.
Managing duration risk — the risk that as rates rise, long-dated bonds will lose value — is important with a fixed-income portfolio.
Creating a bond ladder may help older investors hedge against interest rate risk, says Sean Hughes, a financial advisor with Hughes-Dern Financial Group in Rolling Meadows, Illinois.
By investing in different bonds with different maturity dates, you can spread out the risk associated with rising rates. Hughes says bond ladder exchange-traded funds are an easier way to gain exposure to a broad group of bonds.
[See: 10 Long-Term Investing Strategies That Work.]
Laddering certificates of deposit is another way to manage risk as part of a larger diversification strategy. As rates rise, interest yields on CDs also increase.
While these investments may appeal to your conservative side, investing in CDs could compromise liquidity. In that scenario, Zimmerman says a high-yield savings account may be preferable for older investors.
Annuities and life insurance. Adam Hyers, an independent life insurance agent and founder of Hyers and Associates in Columbus, Ohio, says seniors may be able to squeeze more value from annuities or life insurance as rates rise.
“The last 10 years have been difficult for conservative-minded investors, as low rates have them reaching for yields in riskier investments,” or drawing low yields from money market accounts or CDs, Hyers says.
He says that an extended period of low rates has hurt conservative accounts like fixed and indexed annuities, life insurance plans and long-term care policies. As rates rise, however, these contracts could become more attractive for older investors.
“Multi-year fixed annuities are showing an uptick in growth and should continue to do so,” Hyers says, which may spark renewed demand for these products from retired investors and those nearing retirement.
Don’t throw caution to the wind, however.
“Just because something is higher yielding doesn’t mean it’s necessarily conservative,” Jalinski says, and chasing yields could potentially lead to significant losses.
Bottom line: You don’t want to be bitten by the yield shark, he says.
Real estate. As the stock market climbs, reining in volatility becomes a priority for older investors.
Mike Serio, regional chief investment officer for Wells Fargo Private Bank in Denver, says real estate investment trusts are an antidote to fluctuating stock valuations.
“When rates rise initially, most REITs will trade down; however, our research has shown that longer-term REITs will trade more on fundamentals than interest rates,” Serio says.
Real estate can also insulate a portfolio from the higher inflation that often follows rate hikes.
If inflation drives housing or commercial property prices higher, real estate investors may see better returns from income-producing rental properties. REITs give older investors the benefit of those returns, along with the tax advantages of investing in real estate, without the responsibilities of direct ownership.
Costs. As the interest rate landscape shifts, managing investment fees takes on new importance.
When rates climb, low-fee investments may start to look better, Unschuld says, citing fixed annuities, CDs and government bonds as examples of low or no-fee investments. Because these investments have low fees, “the bang for your buck will get bigger” as rates rise.
Beyond the fees your investments charge, you should also review your financial advisor’s fees. Working with a fiduciary can help you avoid overpriced investments that don’t fit your needs.
[Read: How to Reduce Your Investing Fees.]
You may also need to revisit your overall investment strategy.
“A passive strategy is good for keeping fees low, but you want to make sure you aren’t so passive that you aren’t properly positioned for an interest rate hike,” Jalinski says.
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5 Ways Older Investors Can Capitalize on Rising Rates originally appeared on usnews.com
