The Federal Reserve plans to address ongoing inflation by hiking interest rates several times this year. The first of these hikes could be here as soon as March!
This timing has investors scrambling to safeguard their assets before the market shifts. Tech stocks and other growth sectors are dropping as stakeholders look for more stable “quality” stocks that perform well regardless of inflation or fiscal stimulus.
A slower economy and a stronger dollar could be great news for investors. However, higher interest rates pose a unique challenge after years of easy fiscal policy made investing straightforward. What kinds of stocks should you invest in ahead of interest rate hikes?
When inflation spikes, market experts recommend investing in growth stocks. These are stocks like Apple, Tesla, and Microsoft that analysts expect to gain considerable value in the next five to ten years.
Notably, shares of these companies don’t usually pay dividends. Some companies, like Netflix, can be considered growth stocks even though they don’t turn a profit for years.
When interest rates are low, there is almost no opportunity cost associated with these long-view investments. However, higher interest rates typically also translate to higher treasury bond yields. It “costs” more to wait for these shares to pay back their investment in low-interest-rate environments.
Value stocks, by contrast, are shares of companies that are established and typically pay dividends to shareholders. Examples of value stocks include Berkshire Hathaway, Coca-Cola, and energy companies.
These investments are closely correlated with the US GDP, unlike tech stocks, and are sensitive to inflation and the overall economy. When interest rates rise, these shares overperform compared to other sectors of the economy.
Financial experts say the best way to invest is to diversify your portfolio. Owning shares of only tech companies, or only energy companies, exposes your assets to unnecessary risks. When one section of the market experiences a shortfall, you want your other investments to pick up the slack.
If you’re worried about interest rates hurting your market position, now is the time to invest in value stocks. While you’re at it, consider diversifying further into assets that share nothing in common with the rest of your portfolio.
Diversification is considered “boring” by some investors because it doesn’t have the same potential for explosive growth that a concentrated allocation has. If you’re interested in safeguarding your assets, though, investing in disparate companies is the safest bet.