By Casey West
It is undeniable that the Federal Reserve’s aggressive move to curb inflation by raising interest rates has radically changed the market. However, it has also created a remarkable opportunity for savvy investors to benefit from this new environment.
Let’s go over five strategies we give our clients for optimizing their portfolios based on today’s rates.
How to Create Income and Stability
Let’s start with three simple strategies for taking advantage of today’s rates:
- Adjust your portfolio to hold less equity. In general, equity investments are riskier than other asset classes (e.g., cash and bonds). For investors who hold risky equity in their portfolios, you might consider selling some of those equities and buying bonds instead, which are currently offering higher yields.
- Invest in fixed-income securities with a short duration. Short-term bonds (e.g., government, municipal, and corporate bonds) are investments that pay a fixed interest rate that mature in less than 5 years, but more than 365 days, and are less sensitive to interest rate changes for this reason.
- Consistently monitor your dividend-paying stocks. The biggest reasons for keeping an eye on your stock portfolio in today’s market are to assess the impact of interest rate fluctuations and also to identify new investment opportunities.
How Much Cash Should You Hold?
The general rule of thumb is that cash should make up between 2% and 10% of your portfolio. However, something to consider here is that today’s high interest rates allow that cash to grow more than in recent years.
Cash and Cash Equivalents
Examples of cash and cash equivalents (CCEs) are bank accounts and marketable securities. Here are two types of CCEs to consider in today’s financial climate:
- Short-term Treasury bonds are debt securities issued and backed by the U.S. government. Typically, they have a maturity of one year or less and are considered to be a safe, inflation-protected, liquid investment with a modest return.
- Money market funds are another type of stable, low-risk, liquid investment. U.S. Treasury bills, commercial paper, and CDs are your typical money market funds—they pay dividends based on short-term interest rates.
When investing in CCEs, it’s important to remember to assess how much liquidity they offer. You want to keep your cash easily accessible during market events, so you have the opportunity to purchase good companies with solid balance sheets.
At its core, tax-loss harvesting enables you to reduce capital gains taxes by offsetting capital gains with capital losses. Think of capital gains as the profits you make when you sell an investment for more than what you paid for it; conversely, capital losses happen when you sell an investment for less than what you paid for it.
If you have a taxable investment account, here’s why tax-loss harvesting is a smart strategy to consider in today’s market: Your investments are potentially enjoying substantial gains, which, unfortunately, means your tax liability will be substantial. The goal is to utilize tax-loss harvesting to reduce the tax liability for your investment gains, so you can keep more of your profit and give less to the IRS.
Equity is a type of security you can buy that allows you to own a piece of a company. When the company does well, you earn income from the equity you own.
As we mentioned above in #1, equities are a riskier asset class than bonds or cash. The equities below, however, are worth holding on to:
- Financial preferred stocks. Simply put, financial preferred stocks are issued by financial institutions. High interest rates could be an advantage to the investor here because lenders can earn more on loans, thereby increasing payouts to investors.
- Companies with a consistent dividend structure. If you own equity in a company with a consistent dividend structure, hold on to it; these types of investments can provide a steady stream of income and also increase in value over time.
Let’s put it all together. We’re seeing a momentous change in investment strategy brought on by the tightening of the Fed’s policy. The shift from low interest rates to high interest rates has created new opportunities for conservative investors to enjoy the benefits of low-risk investments.
Take Advantage of the Current Market
At Fogel Capital Management, we pride ourselves on being able to customize our clients’ portfolios based on shifting market policies. We make it a priority to communicate clear, timely investment strategies that align with current market shifts.
About Casey West
Vice President, Private Wealth Advisor
Casey joined Fogel Capital Management in the Fall of 2016. As Trust Administrator, she worked very closely with the families of Supplemental Needs Trust recipients. Her duties included preparing check requests, documenting all activity within trust accounts, preparing and filing annual accountings, and assisting our clients with any request they may have. Casey attended Rhodes College in Memphis, TN and began her professional career working as accounts receivable coordinator, sales representative, and bookkeeper for two successful accessories companies. She is now an Investment Advisor on the Fogel Capital Team. She holds the Series 65 Uniform Investment Advisor License and is dedicated to providing the highest level of service and decorum to our clients.