A lot of investors realize the fact that interest rates are a major influence on the amount they borrow. In the end, the moment interest rates rise as they do, the costs of borrowing increase. But did you realize that interest rates can affect your investment portfolio? While many analysts and investors concentrate on low-interest rates, rising rates alter the market landscape for both individual and corporate investors. Here’s how investors can benefit from the rising interest rates.

KEY TAKEAWAYS

• Interest rates are an element that investors must be aware of when deciding to restructure or modify their portfolios.
• Insuring against increasing interest rates can be achieved by investing in banks, brokerage companies, healthcare, and tech stocks, as well as companies with huge cash balances.
• You can benefit from the higher interest rates by buying real estate and then selling off unwanted assets.
• The floating rate and short-term bonds are also good investments in the rising rate because they can lower the volatility of portfolios.
• Make sure you hedge your bets with inflation-proof investments and instruments that pay a credit-based rate.

 

• Invest in Banks and Brokerage Firms

Brokerage and banking firms make profits from interest. They can, therefore, gain more profit when rates are higher because credit isn’t always accessible during these times. In turn, consumers will have to pay more for borrowing. If the Fed has increased rates of interest previously, financial service companies such as banks and brokerages saw an increase in the income from interest and operational profit margins. 1 2

However, the borrowers are likely to have greater funds in their wallets in times of low-interest rates. The interest rate is low. This means that they typically purchase more and also borrow more money during this period. This means that banks profit from the interest they earn in greater quantities. Even when rates aren’t high, banks are profitable due to commissions, fees, and service charges they charge from their customers.

• Invest in Cash-Rich Companies

Cash-rich businesses benefit from rising rates since they can earn more from the cash they have in their reserves. Investors can search for companies that have lower credit-to-equity (D/E) proportions or businesses with significant amounts of money. Large, established companies that keep cash in reserve are also an excellent opportunity to invest in Apple ( AAPL). The company has $28.4 billion cash at the close of the second quarter in 2023. 3

A successful and large-scale enterprise such as Apple is able to afford substantial sums of cash. A smaller, less established company that accumulates money must be avoided by investors who are cautious about risk since it is not investing in its growth.

• Buy When Rates Are Low

Business owners or individuals contemplating large acquisitions as well as large capital investments considered investments — such as properties or other revenue-generating assets should consider purchasing when they are able to lock in low rates for the long term.

The purchase of goods prior to interest rates rising dramatically could result in significant savings on financing fees as well as overall costs over the long run. Of course, you’ll have to be prepared for rising rates of interest by keeping track of the Federal Reserve’s actions as well as economic conditions.

• Invest in Technology and Health Care

Many investors like dividend-paying companies since they share a percentage of their profits with shareholders. If you’re looking for an avenue of growth that is long-term that is based on interest rates, consider other options.

Mature companies that are in the healthcare and technology sectors are more likely to retain higher earnings as retained profits to invest in opportunities for growth rather than making them available through dividends. 4

• Embrace Short-Term or Floating Rate Bonds

Diversifying your portfolio is essential in moments of instability. This is a good time to find different sources of income, particularly when interest rates increase as well as inflation could be a threat to the economy.

Bond investors (and anyone else in the same way) can lower the risk of their portfolios in rising rate environments by investing in bonds with shorter-term maturities or buying bonds that have coupons that float in accordance with market rates.

Remember that fixed-income vehicles aren’t the only type of investment to take into consideration. Using a strategy that includes multi-asset plans can aid in reducing market risk and provide a higher ROI (ROI).

The choice of flexible portfolio managers will allow you to preserve your capital. They can alter the weightings of sectors and duration exposures based on market fluctuations and changes in interest rates.

• Invest in Payroll Processing Companies

Payroll processors usually have huge cash balances for their customers during the time between paychecks, which is when the cash is paid to employees in the form of payroll. The companies should be able to see a rise in income from interest revenue when interest rates rise.

The most well-known names in this sector are:

• Paychex ( PAYX)
• Automatic Data Processing ( ADP)
• Paylocity ( PCTY)

 

• Sell Assets

Businesses or individuals who do not need properties or other assets could make money selling their support prior to when rates rise again. It is necessary to anticipate rate hikes. People who are looking to buy will be more inclined to buy a property if they still have the option of locking in low long-term rates with their lenders, and therefore, they might be more willing to pay fees to purchase necessary assets before rates start rising.

• Lock in Long-Term Supply Contracts

The rising rates don’t only bring higher profits to those who offer their products and services to customers. Also, they mean higher prices too.

As consumers pay higher interest when borrowing from banks or other lenders, companies also need to think about what higher rates will mean to their bottom line. Businesses that can contract for long-term agreements with suppliers can benefit from higher margins as they avoid higher costs in the long run.

• Buy or Invest in Real Estate

Real estate prices typically increase in tandem with and frequently surpass rates of interest. Making investments in real estate or REITs (REITs) is yet another method to reap the benefits of an increasing rate of inflation.

The rising interest rates sound unfavorable for those who have to borrow money or buy something with credit. However, investors can make money through planning and investing in the right kinds of investments.