As Federal Reserve policy-makers prepare to meet this month, questions hang in the air: Will they or won't they? And if so, by how much?
Most financial experts agree that the Fed, which has bumped up rates six times in the past year, has more tightening to do to head off inflation and will raise rates one or two more times before the presidential election. Many predict that rates will go up at least a half-percentage point more.
For investors, there's another question: How do you invest in times of rising rates? It's not easy, experts agree.
"Investors are anxious and at times confused by conflicting signals they get when rates are rising," said Alan Skrainka, chief market strategist for Edward Jones in St. Louis. On the one hand, they hear that technology companies are immune to rate increases because they don't carry debt; on the other hand, investors are advised to rush into gold, the traditional hedge against inflation, he said.
But the Nasdaq composite index, heavily weighted with technology stocks, is down more than 6 percent since the beginning of the year. Gold, too, is down for the year.
As always, factors such as age, goals and risk tolerance determine the best investment strategy for individuals. But experts say investors these days can benefit from asset allocation, or spreading money among stocks, bonds and cash, as well as diversifying investments within various asset classes.
"You should not have all your eggs in one basket if you are a long-term investor," said Richard Cripps, chief investment strategist for Legg Mason Wood Walker Inc. in Baltimore. "Today's losers can be tomorrow's winners."
Investors also are advised not to make dramatic portfolio shifts.
"That's usually a bad idea because the outlook can change quickly," Skrainka said. "Making a large shift in your portfolio is the equivalent to market timing, which really never works."
But if investors want to fine-tune holdings, experts say, these investments may help weather a climate of rising interest rates:
Consider stocks that pay good dividends, said Chuck Carlson, editor of the DRIP Investor Newsletter in Hammond, Ind. "Higher yields give you some return during a market environment where capital gains may be tough to come by," said Carlson.
Utilities, though sensitive to interest rate boosts because of heavy borrowing for maintenance, traditionally have paid high dividends. Investors already have been seeking safe haven in reliable utility stocks that aren't affected by economic cycles, experts said. So far, the Dow Jones utility average is up 14 percent this year.
