March 31, 2022

How Your Portfolio Can Profit From Rising Interest Rates

As inflation increases around the world due to the impacts of the pandemic and geopolitical events, governments in many countries are expected to increase interest rates. This is clearly demonstrated by the fact that the Bank of Canada recently raised interest rates by 0.25% and further increases are expected later this year. In the United States, the Federal Reserve is planning several interest rate hikes starting in this month.

It is important to note that rising interest rates can be beneficial for certain sectors. For example, banks benefit due to an increased “net interest margin”, the different between interest received and interest paid. Insurance companies benefit from the possibility of achieving enhanced returns on their investments. On the flip side, companies with high debt loads will have challenges as the cost of financing increases. Additionally, companies in the technology sector where profitably is far into the future will also be challenged.

The question investors should be asking is how can I position my portfolio to benefit from a rising interest rate environment? Below are some portfolio tweaks to consider.

Make Sure Your Portfolio Has Exposure To Banks and Insurance Companies: As interest rates rise, banks’ profit margins and interest income should see a noticeable improvement in profitability which should allow for dividend increases over time.

Reduce Long-Term Bonds: The relationship between bonds and interest rates is like a teeter-totter. As interest rates increase, bond prices tend to decrease. Long term bonds are most sensitive to this relationship. To prevent capital losses on bonds, consider shifting bond exposure to shorter term issues. They mature faster and are less volatile and susceptible to interest rate fluctuations.

Use Alternative Assets: Adding alternative assets such as real estate, farmland, timberland, and hedge funds to your portfolio can provide a different source of return that are less correlated to the stock and bond markets. With alternatives, you should be looking “under the hood” to understand what you are buying, the risk involved, and liquidity available. One of Northfront Financial’s core capabilities is helping individual investors access quality alternative investments.

About Northfront Financial

Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and CERTIFIED FINANCIAL PLANNER™ designations.

Share Post: