The Federal Reserve has delivered on its promise with its March 15 decision to raise interest rates, putting it on track for three expected increases this year.
If you are new to investing, this may be the first time you have experienced a rising rate environment. After all, the Fed hasn’t been regularly using this tool of monetary policy since mid-2006.
Here are four investing tips in anticipation of higher rates to come:
Consider tweaks, not an overhaul. There’s a Wall Street mantra, “don’t fight the Fed,” that surfaces at times like this, meaning you need to change your portfolio. That doesn’t mean a complete overhaul is warranted. Instead, ask yourself a key question: Do higher rates affect your long-term expectations for any investments in your portfolio? If so, some tweaks may be warranted. Any changes should be done in the spirit of your original investment thesis.
Boost your retirement savings. As interest rates go up, banks will charge borrowers more for mortgages, credit cards, auto loans and student loans. In theory, they will also increase rates for savings accounts, but such changes could be modest. Instead, you are better off investing surplus money for retirement. First, make sure you are getting your 401(k) match from your employer, then consider an individual retirement account.
Pay some attention to bonds. While higher rates will make bonds attractive down the road — you get to lock in money at a guaranteed rate for a specific time period — this is where you could feel the sting of rising rates.
“For individual investors, higher interest rates in the long term are welcome news, but the problem is, getting there could be painful,” said Jack Ablin, chief investment officer of BMO Wealth Management in Chicago. “Look at your fixed-income holdings and make sure you don’t have too many rates locked in for long maturities.”
Keep the Fed in context. The latest rate hike shows that policymakers have confidence in the U.S. economy’s strength. This marks a “sweet spot” for investors. Such increases are justified by economic reports but are far from sending alarms about whether too-high rates will constrain growth, said Bruce McCain at Key Private Bank in Cleveland.
The market’s got more on its mind than the Fed — and so should you. The return of this type of monetary policy will likely be a blip on your longer-term investing horizon, and it’s important to understand how it will affect your portfolio without obsessing over it.
Anna-Louise Jackson is a staff writer at NerdWallet, a personal finance website.