Bold Wealth's investment playbook when interest rates start to rise

The landscape of interest rates has been nothing short of a roller coaster ride in the last three years, thanks to the pandemic's economic shake-up. For a quick perspective: the Bank of Canada raised its policy rate by a substantial 4.75 percentage points in March 2022, and while it has paused the uptick in recent decisions, the hint of further increases looms on the horizon.

One recent forecast suggests a steady hold at a 5% benchmark rate until April 2024 by the central bank, but even the slightest fluctuation in this rate can significantly influence investors' decisions and ripple across the economy.

At Bold Wealth, we're dissecting the effects of these interest rates on investment strategies and how we tailor wealth management to navigate this terrain.

Understanding stock and bond market reactions to rising interest rates

High interest rates introduce a complex dynamic for investors. As borrowing costs increase, corporate expenses follow suit, often resulting in reduced investment in business growth and a squeeze on cash flow. 

This financial strain can lead to a drop in stock prices, as investors recalibrate the worth of a company's future earnings against the higher cost of capital. Furthermore, the allure of bonds typically strengthens as interest rates rise, but the relationship isn't linear. 

Bonds with longer maturities and lower coupons are disproportionately affected by interest rate hikes. At Bold Wealth, understanding these nuances is crucial in our approach to portfolio construction, ensuring that our clients' investments are resilient and responsive to interest rate movements.

How Bold Wealth secures strong returns during interest rate hikes

Let's talk strategy – because that's what really matters when the interest rate waves come crashing in. Anticipating the peak of interest rates as suggested by the Bank of Canada, we strategically shifted our focus within our short-term holdings to medium-term bonds. 

This move wasn't made in isolation—it was a response to the landscape, aiming to capitalize on the higher yields that these bonds now offered. As a result, our clients have secured returns between 5 and 6% in the fixed income portion of their portfolios. 

Analysts foresee a potential decrease in interest rates by 2024, which could increase the value of these medium-term bonds. While we don’t necessarily plan to sell these assets, their appreciating value ahead of maturity underscores the prudence of our strategy, and provides strong returns in the interim.

Rebalancing for resilience in a high-interest rate environment with Bold Wealth

In a typical balanced portfolio, where 60% might be allocated to stocks and 40% to fixed income and cash, Bold Wealth's approach has been to reassess the fixed income portion. For our larger accounts, we have reallocated over 50% of the fixed income segment into individual medium-term bonds. 

This adjustment is designed to harness the current high-interest-rate environment for the benefit of our clients, offering them a robust buffer against market volatility and enhancing the yield of their portfolios. 

This strategic reallocation is part of our broader philosophy of active management, which allows us to respond to market conditions with agility and foresight, keeping our clients' portfolios on a steady keel.

How can you invest smartly when interest rates are high?

Investing during times of high interest rates requires a mix of caution and opportunity-seeking. It's essential to focus on quality and sustainability, particularly in the stock market. Companies with solid balance sheets, consistent earnings, and low debt levels are typically better equipped to withstand the headwinds of rising rates. It's also a period where dividend-paying stocks can be attractive, provided the company's earnings are robust enough to support the dividend payouts.

On the fixed-income front, diversification remains key. Consider shorter-duration bonds that are less sensitive to interest rate changes, or floating rate notes that can benefit from rate hikes. Moreover, incorporating some inflation-protected securities could help hedge against inflationary pressures that often accompany high-interest rate periods.

For the more risk-averse, it's a good time to review cash alternatives, such as high-yield savings accounts and CDs, which may offer better returns as rates increase. However, remember that liquidity and access to funds can vary, so choose options that match your financial timeline.

Lastly, don't overlook the value of professional advice. Investment strategies are not one-size-fits-all, especially in a fluctuating rate environment. Working with a firm like Bold Wealth means you have a dedicated team to help tailor your portfolio to not just weather the storm, but to find a path to growth despite the challenges.

Elevate your investment strategy with Bold Wealth

At Bold Wealth, our strategy in the face of rising interest rates is both proactive and considered. We have successfully navigated the current economic climate by securing favorable returns for our clients and setting their portfolios up for potential gains in the future. For those seeking a partner to manage their investments with a keen eye on the market's pulse, Bold Wealth is ready to lead the way.

Don't let rising interest rates unsettle your investment journey. If you’re ready to ensure your portfolio is poised to perform, no matter what the economic forecast holds, contact Bold Wealth today.