Simple Ways to Beat Rising Interest Rates

Today’s post is a guest post from Lori Pinkowski, an associate portfolio manager at Raymond James. As the head of the Pinkowski-Allen Financial Group, Lori is responsible for overseeing the assets of numerous wealth clients across Vancouver, BC and the rest of Canada.

As a result, she’s equally concerned with rising interest rates as we are. Below Lori explains a few simple ways investors can beat rising interest rates.

Simple Ways to Beat Rising Interest Rates

By Lori Pinkowski, Senior VP, Raymond James

The Bank of Canada finally raised rates for the first time in almost three years.

What does that mean for your investment portfolio and are there any changes that you should make?

The Bank of Canada, as expected, raised its key rate a quarter point to 0.50 per cent. This is the overnight rate at which major financial institutions borrow and lend one-day funds among themselves and is the basis for other interest rates such as prime rate which is now at 2.50 per cent.

They had been warning us of their plans for months as our red hot Canadian economy continues its speedy recovery so most of this increase was already priced into the stock and bond markets. However, it appears that we could be heading into a new cycle of higher interest rates and investors may need to adjust their portfolio in order to get better returns in this different environment as the various sectors or asset classes will behave differently.

The prices of bonds and preferred shares will fall as interest rates rise so it's important to ensure that your fixed income investments have specific maturity dates so you can simply hold until your principal is returned and not worry about rates moving around. Sticking to shorter term bonds (2014 and shorter) will minimize price fluctuations and allow you to re-invest the money sooner if rates rise substantially. Any preferred shares held should be "rate reset preferreds" which have their dividend rate updated every five years. Often these preferreds simply get redeemed by the issuer at the first reset date so they can be treated like a short term bond.

Review your portfolio for stocks that may be more sensitive to interest rate changes such as financials, utilities or sectors where demand is dependent on debt such as real estate or automotive. Other sectors such as the telecoms tend to withstand a hike as the interest rate increase doesn't really affect whether consumers will use their phones or not while commodities will often see initially higher demand due to the same economic conditions that brought about the interest rate increase. In all sectors, companies with lower debt levels and stronger balance sheets will fare much better with rising interest rates.

The Bank of Canada didn't indicate any plans for additional rate hikes in the near future and with headwinds for global economic growth from Europe and Asia looking to cool its growth slightly we are likely safe from any more changes for now. The gradual increase of interest rates will help minimize their impact but it is important to plan ahead and look through your portfolio for any fine tuning that it might need to reduce your interest rate risk.

Regards,

Lori Pinkowski
Senior VP, Raymond James
www.pinkowski.ca

Lori Pinkowski is an associate portfolio manager and senior vice president at Raymond James and is a regular commentator on CKNW radio network. Additional information is available at Lori Pinkowski’s website: www.pinkowski.ca. This article is for informational purposes only.

This article was originally published on June 13, 2010 in North Shore News.