Investing Wisely: Navigating Rising Interest Rates

Interest rates have a big impact on investors' debt. As rates climb, the cost of borrowing goes up. But did you know that rates can also affect your investments? Here's how to invest when interest rates are rising.

How to invest in rising interest rates

When interest rates rise, the cost of borrowing goes up. This can affect your investments, changing the marketplace landscape for businesses and individual investors using online brokers and trading platforms.

If you're looking to invest in rising interest rates, you could consider investing in banks and brokerage firms, tech and healthcare stocks, and companies with large cash balances. You can also capitalise on higher rates by purchasing real estate and selling off unneeded assets. Short-term and floating-rate bonds are also suitable investments during rising rates as they reduce portfolio volatility.

You could also hedge your bets by investing in inflation-proof investments and instruments with credit-based yields. Banks and brokerage firms earn more money when rates are higher, as credit isn't as readily available during these times. As such, consumers have to pay more to borrow.

If you're planning on making major purchases or capital expenditures viewed as investments, such as property or revenue-generating assets, consider buying when you can lock in low long-term rates. Purchases made before interest rates rise significantly can result in substantial savings in financing charges and overall long-term costs.

To manage risk in your investment portfolio, diversify your asset allocation and regularly rebalance to ensure you're on track to reach your goals.

Fixed income and equity exchange-traded funds

Rising interest rates can be a good time to invest in banks and brokerage firms, tech and healthcare stocks, and companies with large cash balances. You can also consider purchasing real estate and selling off unneeded assets.

Short-term and floating-rate bonds are also suitable investments during rising rates as they reduce portfolio volatility. You can also invest in inflation-proof instruments with credit-based yields.

If you are interested in fixed-income securities, it is important to note that not all are equally affected by rising interest rates. Long-term bonds are more severely impacted by rising interest rates. To hedge against this, investors can consider purchasing floating-rate securities, such as floating-rate bonds and bank loans, as their coupon payments adjust with changes in interest rates. Investors can also consider laddering their bond portfolio, which involves investing in bonds with a range of maturities. This strategy can help mitigate the impact of rising interest rates, as the bonds in the portfolio will mature at different times, providing a steady stream of income and capital gains.

Equity investors also pay close attention to the interest rate environment. If the Federal Reserve raises the short-term federal funds target rate, it can have a detrimental effect on stocks. However, this does not always happen, and in 2025, U.S. stocks generally moved in a positive direction despite higher interest rates.

How rising interest rates affect investments

Rising interest rates can have a significant impact on investments, and investors may need to rethink their holdings and strategies. Here are some ways in which rising interest rates can affect investments:

Firstly, higher interest rates can make borrowing more expensive, reducing cash flow and leading to stock price declines. This can be particularly harmful to companies with high levels of debt, as their profitability may suffer. As a result, investors may want to seek out higher-quality investments and avoid riskier assets.

Secondly, the prime rate can indirectly impact the stock market. When the prime rate is high, it can affect the performance of investments, with higher interest rates typically hurting the market. However, some sectors, such as the financial industry, may benefit from high-interest rates.

Thirdly, investors who believe that interest rates will continue to rise may want to focus on short-term rate investments, as these are most affected by Federal Reserve moves. Additionally, certain funds, such as TBT and FLOT, can provide exposure to U.S. Treasury securities and investment-grade floating-rate corporate bonds, respectively, offering potential returns while managing risk.

Finally, to manage risk in an investment portfolio, it is essential to diversify asset allocation and regularly rebalance to ensure alignment with investment goals. By doing so, investors can better navigate the impact of rising interest rates and protect their investments.

How to manage high-interest debt

As the prime rate climbs, high-interest debt can become a burden. Here are some ways to manage it:

• Consult existing high-interest debt to avoid accruing more interest.
• Rebalance your investment portfolio by diversifying your asset allocation and regularly checking to ensure you're on track to reach your goals.
• Focus on short-term rate investments, which are most affected by Fed moves.
• Seek out higher-quality investments with less risk, such as FLOT, which tracks an index of investment-grade floating-rate corporate bonds with maturities of zero to five years.
• Consider investing in the financial industry, which often benefits from high-interest rates.

How to rebalance your investment portfolio

As interest rates climb, investors may want to rethink their holdings that are more sensitive to interest rate increases. Here are some ways to rebalance your investment portfolio:

Firstly, pay down high-interest debt. High-interest debt, like credit card debt, can be especially harmful when the prime rate is high. To avoid accruing even more interest, consult existing high-interest debt.

Secondly, diversify your asset allocation. The prime rate can indirectly impact the stock market, so to manage risk, regularly rebalance your portfolio to ensure you're on track to reach your goals.

Thirdly, consider short-term rate investments, which are most affected by Fed moves. Investors who believe that interest rates will continue to rise this year and into the next could benefit from a focus on these types of investments.

Finally, seek out higher-quality investments. Avoid reaching for yield with riskier assets. For slightly higher returns with less risk, consider FLOT, which tracks an index of investment-grade floating-rate corporate bonds with maturities of zero to five years for slightly higher yields over Treasurys.

Frequently asked questions