XEQT:CC - Investing in the Era of Rising Rates: 5 Tips for Every Canadian
2023-11-22 20:15:00 ET
In recent times, you might have heard the term “higher for longer” being thrown around quite frequently.
If you’re wondering what this buzzword means, it’s signaling a significant shift in the economic landscape. In layman’s terms, the era of ultra-low interest rates that we’ve been accustomed to over the past decade is over.
The Bank of Canada has set the policy interest rate at 5% as a measure to tamp down the rising tide of inflation. This pivot ushers in a new reality for borrowers and investors alike.
Here are five savvy tips for investing in the current climate of rising interest rates, along with an ETF pick to watch for each.
Tip #1: Cash equivalents
Gone are the days when holding cash in your portfolio meant settling for meager returns. In the current financial landscape, cash has made a surprising comeback as a contender for balancing your investment portfolio.
With high-interest savings accounts now offering yields close to 5%, investors have the opportunity to earn a nearly risk-free return. This rate is competitive, especially when compared to the volatility associated with stocks and bonds.
Holding cash provides a buffer against market downturns and also ensures liquidity, giving you the flexibility to take advantage of investment opportunities as they arise.
ETF to watch: Purpose High Interest Savings ETF ( TSX:PSA )
Tip #2: Low volatility stocks
In times of market uncertainty, low volatility stocks can be a beacon of stability for your portfolio. These stocks often belong to sectors like utilities or consumer staples, industries that provide essential services and goods that remain in demand, recession or not.
By including low volatility stocks in your portfolio, you’re still invested in the market, but with a more defensive stance. This approach allows you to potentially continue generating returns while mitigating risk, offering a smoother investment experience without fully retreating from equities.
ETF to watch: BMO Low Volatility Canadian Equity ETF ( TSX:ZLB )
Tip #3: Long-term bonds
Here’s a tip that’s a bit counterintuitive, especially in a rising rate environment: long-term bonds might be worth a look. Now, this comes with a caveat—it’s riskier, particularly if interest rates continue to rise.
But here’s the potential upside: if central banks like the Bank of Canada decide to cut rates to stimulate the economy (usually in response to a recession), then the value of long-term bonds could increase substantially.
But why? Bonds have an inverse relationship with interest rates. When rates go down, bond prices go up—and this effect is magnified in long-term bonds.
ETF to watch: BMO Long Federal Bond Index ETF ( TSX:ZFL ).
Tip #4: Gold
Gold has always been considered a unique asset class. Its primary benefit in a portfolio is that it doesn’t necessarily move in tandem with stocks and bonds. This lack of correlation with traditional investments can be advantageous.
Gold’s performance doesn’t hinge on corporate earnings or interest rate decisions, which largely influence stock and bond markets. Instead, it reacts to factors like global geopolitical stability, currency strength, and inflation trends.
Why is this good? When stocks and bonds are falling, gold is widely viewed as a “safe haven” asset. Investors flock to it during periods of uncertainty or when they anticipate inflation because it’s a tangible asset that has maintained its value.
ETF to watch: iShares Gold Bullion ETF ( TSX:CGL )
Tip #5: Globally diversified stocks
Sometimes, the wisest investment decision is to maintain the course. If you’ve built a globally diversified stock portfolio that spans various sectors and regions, you might be best served by simply ignoring the noise of daily financial news.
Over the course of many market cycles, interest rates will fluctuate—they’ll rise, and they’ll fall. However, a well-diversified portfolio is designed to weather these changes. It’s underpinned by broad exposure to the global economy, which can smooth out the ups and downs associated with any single market or sector.
Staying invested over the long term also means you’re not trying to time the market—a strategy which can often backfire. Instead, you’re allowing your investments to compound and grow over time.
ETF to watch: iShares Core Equity ETF ( TSX:XEQT ).
The post Investing in the Era of Rising Rates: 5 Tips for Every Canadian appeared first on The Motley Fool Canada .
Fool contributor Tony Dong has positions in the BMO Low Volatility Canadian Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
2023