Ideas for investing in times of rising interest rates

When interest rates rise, the market has a struggle.  The problem is that though bonds become attractive to new investors (since they begin to pay higher interest rates), the investors that have already bought the previous, lower interest-rate bonds are stuck in their previous arrangement.  To get out of that arrangement becomes expensive and those investors risk losing ground on the returns they have collected so far. That means bond funds become less attractive. Now people investing with their 401k or IRA accounts aren’t able to invest directly in bonds. They have to use bond funds. That means that in times of rising interest rates, moving money into bonds is a bad idea, because the prices of those bond funds will go down.

So what to do? Should you simply invest in stocks instead?  That’s difficult to tell because stocks sometimes go up and sometimes go down when interest rates rise. Generally speaking, you won’t expect to see stocks make significant gains over a longer period of time if interest rates are rising, so stocks aren’t the best idea at that time either.  The best idea is likely to be cash, or in the case of 401K or accounts it will be the money market funds. If you have a high risk tolerance, then you might consider putting half your savings in the money market fund and then allowing yourself to put money the other half in a mix of stocks and bonds.

In an IRA you’ve got a lot more options. You can purchase TIP, an inflation protected bond fund, or you can purchase TBT, an inverse fund that moves up when bond funds go down! You can also look around the globe to see what countries have a booming economy.  All you need to do is bring up a chart of these country-specific ETFs and compare it to SPY similar to the way the book talks about comparing the utilities index with the S&P 500.  Here are some country-specific ETFs to consider under those circumstances:

EWG – Germany

EWS – Singapore

EWZ – Brazil

EWP – Spain

EWC – Canada

EWH – Hong Kong

EWA – Australia.

If any of these stocks is going higher faster than the SPY, it will make a suitable replacement for the portion of your money you want to put into stocks.

4 Responses to Ideas for investing in times of rising interest rates

  1. Connie says:

    Thanks for the information about rising interest rates and the list of
    ETF’s. Invest to Win is a great book. I am anxious to try the strategies for STOP and GO markets. However it looks like we will have to stick to cash and foreign market ETF’s for now. Really appreciate this web site.

  2. Audrey says:

    Love the book Toni and Gordon. Am thinking of recommending it to my book club. How do you differentiate from a normal 5-10% correction and a full on bear market? I don’t want to be switching in and out of funds for a run of the mill correction? thanks

    • Gordon Scott says:

      A 5 to 15% correction most often won’t show a rising ATR over the two month period during that correction, and the S&P will likely outperform the Utilities sector either. A 5 to 10% correction will be over so quickly that the STOP sign indicators don’t usually trigger. But for some strange exception, that’s why there is this site!

  3. Fred Perkins says:

    I have a question on your new book. The Dow Jones Utilities average (DJU) is at 509.16, per today (4/2/2013). I compared it for the last ten years against SPY and the graph looks nothing like your comparison graph on P71 of your book Invest to Win. Can you help me out. Maybe I have the wrong symbol for the Down Jones Utility Average. The right hand pane shows a range from 50 to 120 and the December 2012 reads about 90. Thanks for any help on this. Interesting reading so far. Fred Perkins

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