Are YOU Ready for Rising Interest Rates? Wall Street Sure Isn’t!

Mike Larson

Do you want to know what I find sad? Many of the so-called “experts” on Wall Street have NO EXPERIENCE with rising interest rates. Zero. Zippo. Zilch.

It’s not necessarily their fault. Until December 2015, the Federal Reserve hadn’t raised interest rates since June 2006. That’s nine and a half long years. You could’ve graduated high school in 2006, graduated college in 2010, gotten a master’s degree in 2012, and worked a few years in the industry without once seeing the Fed raise rates.

And that’s just short-term rates. While the Fed directly controls the overnight federal funds rate, the bond market controls long-term rates like those charged on 10-year and 30-year Treasuries.

If bond investors are worried about rising debts, rising deficits, rising growth, and rising inflation, they won’t give a hoot what the Fed says or does. They’ll dump their longer-term bonds to avoid losing money, driving those key long-term rates higher in the process.

We’ve had some mini-bear markets in bonds over the years, most recently in 2012-2013 and before that in 2003-2007. But the last whopper of a bond bear market occurred in the late-1970s/early-1980s.

It may be hard to believe, but the funds rate soared to more than 19% back then! The yield on a 30-year bond topped 15%. That makes today’s equivalents of 1.5% and 3.15% look microscopic by comparison, even after their recent increases.

My advice? Be careful who you listen to when it comes to interest rates – whether they’re talking on TV, writing in an investment newsletter, or even sitting behind a desk at your broker’s office. If they haven’t lived through at least a handful of “up” cycles for interest rates, nor studied the heck out of decades worth of rate history, their advice might not be worth a hill of beans.

That’s because rising rates impact all forms of investments to some degree – stocks, bonds, currencies, ETFs, mutual funds, you name it. “Experts” who don’t know what to own, and when to own it, at different phases in the interest rate cycle, could end up costing you boatloads of money!

For my money, I think we’ve come a long way in a short period of time. Interest rates are likely to take a breather soon, and we’ll probably get some backing and filling in bond prices. But the long-term trend has clearly shifted, what with five-year Treasury Notes yielding the most since 2010 and the funds rate at its highest level in almost a decade.

So, you’ll want to emphasize things like floating-rate and short-term, lower-duration bond funds. They have less interest rate risk than other fixed-income alternatives. Dial down your exposure to rate-sensitive sectors like utilities and REITs, and favor “growthier” sectors in the dividend-paying stock universe. More specifics and my favorite names can be found in my High Yield Investing newsletter

Until next time,

Mike Larson

P.S. Are you getting my updates on Twitter, too? If not, you can follow me using the handle @RealMikeLarson.

About the Income & Dividend Analyst

In an era of high-risk exuberance, Mike Larson stands out as a leader in conservative investment strategies that outperform the market overall. Using the safety-oriented Weiss Ratings as a guide, he has a proven history of guiding investors to stocks and ETFs that provide asset protection, consistent dividends and excellent growth.

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