How to invest while making today’s higher interest rates work in your favour.
We sometimes wax nostalgic about our youth, a time when we were more adventurous, spontaneous, and willing to take risks. And although occasionally, we might still be tempted to take a walk on the wild side — many of us have happily reached a point in our lives that is more settled, responsible, and calm.
Similarly, we mature as investors. Although the stock market may remain the focus of many portfolios, you might currently be looking to diversify by adding more stable investments with regular income. It’s time to be boring.
Although we may prefer the days when interest rate hikes didn’t dominate headlines, every cloud has a silver lining — and every market has good investment opportunities, if you know where to look. Here’s how to make today’s higher interest rates work in your portfolio’s favour.
1. Take advantage of high-interest rates with bonds
When interest rates rise, it can be a good time to consider investing in bonds, since their dividend payouts will be higher.
Bonds have been making a comeback with investors lately, mainly because they have the potential to provide a regular income, and can be a useful complement to traditional investments in a diversified portfolio.
2. Consider bond ETFs
Bond ETFs are in many cases more accessible and straightforward to invest in than individual bonds.
For example, if you have a smaller sum available for investing, know that bond ETFs require far less capital than individual bonds. And since they hold a variety of bonds issued by different entities, bond ETFs automatically offer good diversification.
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3. Adjust your exposure as needed
Once you invest, continue to monitor interest rates, since changes can impact a bond’s value.
Bond ETFs can be bought and sold throughout the trading day, just like stocks. So, rather than having to commit to holding it until the bond matures, investors can quickly and easily adjust their exposure to the bond market at any time.
4. Lock in high-interest returns
Long duration bonds like those in the iShares Core 10+ Year USD Bond ETF (ILTB) can lock in high-interest returns for long-term income.
Long duration bonds are bonds with a maturity of 10 years or more. And although they may be exposed to some price volatility along the way, you can still expect to earn a solid return on your investment in the long run, if held to maturity.
74% of retail CFD accounts lose money
5. Or go for shorter-term gains
Generally speaking, the shorter the duration of a bond, the less likely it is to be volatile. An excellent option for those looking to enjoy a return in less than three months is The SPDR Bloomberg 1-3 Monthly T-Bill ETF (BIL).
T-Bills (short for treasury bills) are widely considered to be among the safest investments available because they are backed by the full faith and credit of the US government. And in the current high-interest rate environment, T-Bills are an attractive investment option offering high coupon payments.
74% of retail CFD accounts lose money
6. Pay attention to ratings
Especially when it comes to corporate bonds, you’ll want to look at ratings. These can help you to evaluate which are lower or higher risk. For example, if you are a beginner who prefers to stay away from high-risk products, look for AAA, the highest rating; bonds rated Ba1/BB+ or lower indicate higher risk.
The iShares iBoxx High Yield Corporate Bond ETF (HYG) has an A rating, and could be a great option for those who are willing to take on slightly more risk (but still lower risk than some other high-yield investments or individual corporate bonds) in exchange for greater reward.
74% of retail CFD accounts lose money
7. Consider the US bond market
The Vanguard Total Bond Market ETF (BND) is the world’s largest fixed-income fund with over $80 billion in assets. This fund invests in a very diverse range of highly rated US bonds, making it an excellent choice for investors seeking high-quality, diversified exposure to the vast US bond market.
74% of retail CFD accounts lose money
This communication is general information and education purposes only and should not be taken as financial product advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial product. It has been prepared without taking your objectives, financial situation or needs into account. Any references to past performance and future indications are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.