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.
What Are Bond Ladders?
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."
Discover more from Onward
Keep reading the latest issue online or view the print edition.
" id="body_disclosure--media_disclosure--241601" >Keep reading the latest issue online or view the print edition.
We can help you build a diverse portfolio.
More from Charles Schwab
Closing Market Update
Opening Market Update
7 Reasons to Consider Municipal Bonds Now
Related topics
Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing.
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.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
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.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.
Schwab Wealth Advisory™ ("SWA") is a non‐discretionary investment advisory program sponsored by Charles Schwab & Co., Inc. ("Schwab"). Schwab Wealth Advisory, Inc. ("SWAI") is a Registered Investment Adviser and provides portfolio management for the SWA program. Schwab and SWAI are affiliates and are subsidiaries of The Charles Schwab Corporation.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
0624-MZ4M