For years, lower interest rates have been conducive to investing in financial markets. But as inflation continues to dominate headlines, pressures are mounting on central bankers to keep price pressures in check.
With both the Bank of Canada and the Federal Reserve expected to hike rates in 2022, more and more investors are coming to terms with the fact that rising rates are inevitable. How can investors offset the impact of higher interest rates on their investment portfolio?
Not all asset classes embody the same characteristics. As such,
investors can mitigate the impact of rising interest rates by
adjusting their allocations across asset classes.
While the table below is in no way indicative of the uncertain future, it gives an idea of how various types of investments have performed in rising and falling interest rate environments.
As shown, equities posted robust gains in rising rate environments
while fixed income securities lagged. This is the case because fixed
income tends to move in the opposing direction of interest
rates.
Bonds are an integral component of any diversified portfolio. Not only do they offset the risk that equities bring, but they provide a steady flow of income that can be reinvested as interest rates rise.
As can be seen in the table, fixed income categories such as U.S.
high yield bonds and Canadian preferred shares also boasted strong
returns, suggesting that managing exposure within the fixed income
category may be more viable than selling one’s securities
outright.
When rates rise:
When rates fall:
Predicting interest rate movements is a daunting task, but consistently doing so with absolute certainty is the real challenge. What truly matters is maintaining a well-diversified portfolio of asset classes and staying focused on the long-term, regardless of where interest rates are headed!
NBI Floating Rate Income Fund
NBI Preferred Equity Income Fund
NBI Unconstrained Fixed Income Fund
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