ACTION PLAN
During high interest rate period:
- Try to include bonds in your portfolio to mitigate the effects of rising interest rates.
- Keep an eye on your stocks and reconsider whether you should keep them or sell them if they are underperforming significantly.
- This is an excellent time to acquire great fundamentally sound stocks at a discount.
During low interest rate period:
- Great time to get good bonds at a discount.
DEEP DIVE
The bond market and interest rates have a well-established relationship.
Interest rates are an important factor for businesses because they affect borrowing costs for businesses and individuals, who will spend less and save more if interest rates rise.
This is because higher interest rates make borrowing more expensive, so companies and individuals borrow less, economic activity slows, and company profits fall, all of which have a negative impact on share prices.
As a result, some investors may prefer fixed income securities such as bonds, which have higher returns as interest rates rise.
When interest rates fall, however, it becomes less expensive for businesses to borrow money. This increases their profits and makes them more valuable, positively affecting share prices.
At this point, investors may return to stocks, which outperform bonds in terms of returns.
Now, for investors who manage portfolios of both stocks and bonds, their overall return is still likely to be positive. The interaction of stocks and bonds as interest rates fluctuate balances each other out.
Jessica Sin
SFA Instructor
Professional in Corporate Finance Sector
Worked Previously in Venture Capital Firms
