How to invest for a rising interest rate environment

[jIMOh]

I know rates are going down... but they cannot go much lower.

I know the value of bond funds will drop as rates increase.
What types of investments tend to increase in value when rates increase?

If Fed reverses course and raises rates quickly, any thoughts as to what investments would do well?

 

[MasterBlaster]

This chart represents where one might put there money as the business cycle progresses.

 

[youbet]

This chart represents where one might put there money as the business cycle progresses.

Nice chart MasterBlaster! Where can I get the version with dates so I know when to do what? I don't see "stage 1.....stage 2....." on my calendar!

 

[MasterBlaster]

Oh did I leave the dates off, silly me !

here's some other variations on the asset allocation versus business cycle chart:

 

[OAG]

CD Ladder. But that is all I know - for 29 years now. The have worked fine for me APR about 5.7% year in and year out. Sorry I do not have any charts. Nothing pretty but at least is it steady.

 

[audreyh1]

I don't think the Fed will reverse course quickly. And yes, interest rates could still go down from here.

Audrey

 

[socca]

I know rates are going down... but they cannot go much lower.

No, they aren't (in general). The Fed has direct control over one particular rate at the very short end, the others float freely. Right now, the yield curve is very steep at the short end and then relatively flat out to 30 years. In munis, at least, rates are rising across the yield curve - not surprising as frightened investors suddenly become risk-adverse. Somewhere on the web there's an animated display showing how the yield curve has gyrated over the last 30 years - it's fun to watch.

If your crystal ball indicates that rates are going to rise across the board and you're in the mood to invest in bonds, then you should park your money in a money-market fund (preferably one that doesn't break the buck ). In normal times, you can often walk out the yield curve a bit and get much better total returns with very modest risk to principal. For example, Vanguard's Short-Term Tax-Exempt fund shows a positive return YTD - fairly amazing considering the carnage everywhere else.

 

[riskadverse]

RRPIX - Rising Rates Opportunity Fund
RTPIX - Rising Rates Opportunity 10 Fund