4 Ways to Approach Falling Interest Rates

June 14, 2024
Schwab experts on how investors can respond once interest rates begin to fall.

Many Schwab clients are asking about positioning their portfolios for an expected decline in interest rates. Here's how two Schwab strategists and a wealth advisor approach the issue.

Look for higher-quality equities

"Although many analysts expect the Federal Reserve to lower interest rates this year, pay particular attention to why it's cutting them," says Kevin Gordon, a senior investment strategist at Schwab. "If the labor market and growth remain steady and inflation continues to recede, the Fed might decide higher rates are no longer necessary—a pretty good scenario for equities. But if the Fed is cutting on the concern that the economy might be stalling, a bear market, or at least a correction, may be more likely.

"One way you can hedge is to look at high-quality stocks that are well positioned to continue servicing their debts—as measured by a high or rising coverage ratio—which is helpful in the event of higher-for-longer borrowing costs."

To research and compare stocks by their coverage ratio, log in to use the stock screener and, under Dividends, select Coverage Ratio – TTM.

Consider adding fixed income if you're underallocated

"After the rocky ride that fixed income investors have had over the past few years, some people may be hesitant to buy bonds right now—but it depends on your situation," says Collin Martin, CFA®, a director and fixed income strategist at the Schwab Center for Financial Research. "If you're fully invested up to your fixed income allocation, enjoy the income. However, if you're underallocated and looking to potentially lock in higher income than we've seen for most of the past 15 years, bonds strike me as pretty attractive."

The Schwab Mutual Fund OneSource Select List® can help you screen quality funds that match your risk tolerance and investment time horizon.

Explore a bond ladder

"If you do want to secure some yield, a good way to do that is with a bond ladder," Collin adds. "The idea with laddering is to spread out the maturity dates of the bonds or CDs in your portfolio and then reinvest the proceeds as they mature. If you do this with discipline, you can manage interest-rate risk by smoothing out the fluctuations in bond or CD yields. You also gain liquidity, flexibility, and relatively steady cash flows."

What are bond ladders?

Learn how to use bond ladders to help lower interest rate risk and generate regular income.

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Don't rule out buying a home

"Mortgage rates are higher than they've been for years, and housing prices in the U.S. are at a record high—but that doesn't necessarily mean you should hold off on a purchase," says Tania Volk, a senior wealth advisor for Schwab Wealth Advisory. "For one thing, as rates fall and demand for homes increases, prices may well rise further, offsetting any savings from a cheaper loan. For now, a good option may be to get a mortgage that fits your budget and gets you into the house you want, knowing that you can almost always refinance should rates drop significantly."

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

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A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio. As compared to other fixed income products and strategies, engaging in a bond ladder strategy may potentially result in future reinvestment at lower interest rates and may necessitate higher minimum investments to maintain cost-effectiveness. Evaluate whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance and financial circumstances.

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