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How investors can take advantage of rising interest rates

How investors can take advantage of rising interest rates

March 10, 2023

Rising interest rates can have a negative effect on your personal wealth, making borrowing more expensive, driving down home values in some areas, and decreasing the value of some investments. But there is an upside as well. As rates rise for interest on debt, they typically also rise for interest on savings. In our current economy, that means you now have opportunities to earn higher returns on various fixed-income investments.

Capitalizing on high interest rates

Consider the economic impact of high interest rates on real estate in Los Alamos, NM, where the majority of our clients work at Los Alamos National Laboratory (LANL). In recent years, the Lab has been hiring thousands more employees, driving up competition for the low inventory of homes for sale.1 With steep rates, buyers face a substantially higher cost to homeownership, decreasing personal wealth and cashflow.

It is just one example of when investors may be looking at strategies to offset some of that pain with higher yield returns. And now, opportunities are better than they have been in years.

As lending interest rates go higher, financial institutions anticipate a decline in both loans and cash on deposit. To counter that, they increase APY (annual percentage yield) rates on savings to entice people to park their money with that institution. For instance, Certificates of Deposit (CDs) that used to deliver less than 1% are now rocketing to rates of nearly 5%.

High-yield strategies to potentially grow wealth

Taking advantage of higher fixed rates of return can be an effective way to keep your financial goals on track in a challenging economy. At Buffalo Financial Strategies, we can help you explore a range of opportunities based on your unique needs and circumstance.

Here are just a few options we can explore:

    • Dividend-paying stocks: These investments, often in high profile brands, can provide a steady stream of income, which may be of interest to investors nearing retirement. As interest rates rise, stocks may become less attractive, but companies that consistently pay dividends can still provide a reliable source of income.

    • High-quality, short-term bonds: As debt interest rates increase, the value of long-term bonds may decrease. Investing in short-term bonds with high credit ratings may help reduce risk. Another consideration is that if value drops on bonds in the near term, those assets can be purchased at a lower price, with the potential for long-term appreciation in the future.

    • Laddering strategy: Laddering provides some hedge of market risk, while delivering a predictable rate of return. With this strategy, an investor chooses bonds (or CDs) with different maturities (short, medium and long term). At maturity, proceeds can be reinvested into bonds with a competitive interest rate at that time. If debt interest rates increase, APY rates typically rise as well. So even if bond values decline, laddering gives you more flexibility to potentially take advantage of higher rates of return.

  • Annuities: A fixed annuity is an insurance contract that guarantees the buyer a fixed rate of return on their contributions for a specific period of time. Fixed annuities can be helpful for investors interested in premium protection, income for life and low risk.

Investment strategies like these may be a fit depending on your risk tolerance, financial circumstances, and number of years until retirement. You might be more comfortable with less market volatility. We can help you assess (or re-assess) both your personal risk tolerance and that of your portfolio. It helps ensure your portfolio is properly aligned to suit your own personal situation and financial goals.

Bottom-line is that a volatile economy and rising inflation can deliver investment opportunities as well. Interested to learn more?  Schedule a meeting with me and we can talk through options for you.




1   LANL, Hiring And Local Housing, Los Alamos Reporter, Dec 2022