When the interest rates on an investor’s fixed income instrument go down, they can use several strategies to make their investment more likely to make money.
In this section, we’ll talk about the different ways investors can make money when interest rates go up:
Rising Interest Rates: What To Do?
1. Invest in Short-Term Bonds
If you’ve been investing for a long time and the interest rate has been going up, reducing the length of your investment portfolio may help reduce the risks that come with the interest rate.
Because the value of bonds goes down when interest rates go up, bonds bought for the long term could lose a lot of value if interest rates go up. This strategy could be helpful in several different situations.
Even though the interest rate on short-term bonds may be lower than that on long-term bonds, it is safer to hold on to short-term bonds until they mature. This is because their prices are less likely to drop by a lot when interest rates change.
Because of this, they are easier to sell even when interest rates are high. To invest in these bonds, you can apply for 15-minute loans from direct lenders in the UK or investment loans. These direct lender loans are easier to manage and have lower interest rates.
2. Opt for Bond Ladders
Bond ladders are another way to put your money to work. In this way of investing, you buy bonds that are due at different times. How far up or down this ladder depends on how long you plan to keep your money in this particular investment vehicle.
A shorter ladder can last anywhere from one to seven years, while a taller ladder can last as long as thirty years. To keep this ladder in good shape, bonds that are coming due must be re-invested in new bonds that are also coming due.
This keeps the target balance. If you use this method, you might be able to lower the risk that comes with buying bonds when interest rates are going up. Investors buy bonds with different maturities, like short-term and medium-term bonds.
They have more control over how much they are exposed to the risk that the interest rate will change. Investors can take advantage of an interest rate that is going up. They need to put the money from bonds that are coming due into new bonds that are coming due at the same time.
Bond ladders also give you a steady flow of cash that you can count on. Bond ladders are an excellent way to reduce the interest rate, despite requiring a significant amount of cash.
3. Floating Rate Bonds
Bonds with a rate that changes over time are called “floaters.” They have an interest rate that changes over the life of the loan. This happens at regular intervals.
Even though the bond’s yield will change based on how the reference interest rate changes, the spread will almost always stay the same. The yield can be reset daily, weekly, or monthly, as well as after three, six, and 12 months have passed.
Floaters can effectively reduce the risk that is associated with the interest rate. As a result, they perform better than typical fixed-income investments when the interest rates continue to rise.
If and when the interest rate goes down, the investors in this investment might get less money back. This is the main problem with the investment. Also, the risk of the interest rate is less with variable-rate bonds.
The initial coupon of a floating-rate bond is lower than that of a fixed-rate investment. It has the same credit quality and maturity as a variable-rate bond does. This is because the credit quality and maturity of both categories of assets are similar.
While the current state of the market and the long periods of lower-than-average interest rates are taken into account, investors are showing signs of confidence even though the rate of interest is always going up.
At this point in the economic cycle, bonds with a variable interest rate are a suitable investment method. They also protect against price increases that might happen in the future.
4. Invest in Cash-Rich Firms
Companies with a lot of cash on hand also benefit from higher interest rates because they can earn more on their cash reserves. An investor should look for companies with a low debt-to-equity ratio or a large amount of cash compared to their book value. Both of these are good qualities to have.
5. Invest in Healthcare and Tech
Most companies in the healthcare and technology industries keep a portion of their profits as retained earnings. Instead of giving them out as dividends, this is so they can use the money to grow their businesses in the future.
From what we know about the past, when interest rates are high, situations like this almost always lead to more money coming in. In the last 50 years, when the interest rate went up, the healthcare and technology industries gained an average of 13% to 20%.
6. Invest or Purchase Real Estate
If you want to buy or invest in real estate, you should know that real estate value usually goes up at the same rate as interest rates and sometimes even faster. This is true whether you are buying or selling the property.
When interest rates rise, buying or investing in real estate is another way to make money and keep up with inflation.
7. Sell Your Property
Whether you own a business or are a private person, you can sell any property or other assets you no longer need. If you do this, you will increase your chances of selling these assets for a profit before interest rates start to go up.
The buyers may want to buy the house when interest rates are low and will stay low for a long time. This is needed so that they will be willing to pay the premiums to buy the assets they need before the rates start to go up.
8. Invest in Brokerage Businesses
Brokerage firms make money from the interest they get on the cash balances that their clients keep in their own accounts. Because of this, they make more money when rates are high because they get more interest.
Here are the statistics on UK basic interest rate from 2012 to 2022:
In 2022, the official bank base interest rate in the UK went up 5 times. This was a direct response to the rising cost of living. In March 2020, the Bank of England lowered the official bank base rate in England to a record low of 0.1%.
This was done to help the economy recover from the effects of the COVID-19 epidemic. This all-time low happened just seven days after the Bank of England cut interest rates from 0.75 percent to 0.25 percent to stop many people in the UK from losing their jobs.
It stayed at 0.1 percent until December 2021, when it went up to 1%. In October 2022, it went up again, this time to 2.25 percent.
When interest rates rise, it is easy to make money by investing in companies. But invest in companies that will do well or are already doing well when interest rates are high.
Some examples of these kinds of businesses are healthcare and technology companies, broker firms, and businesses with a lot of cash on hand.
As an investor, you can take advantage of the possibility of higher interest rates to make money. You can use your savings or apply for loans with no guarantor from a direct lender for buying real estate property. When interest rates are going up, short-term and floating-rate bonds are another good way to put your money to work.