How to Invest for Rising Interest Rates

Although many investors and analysts focus on interest rates being low, rising interest rates change the landscape of the marketplace for businesses and individual investors. Here’s how investors can profit from rising interest rates.

Key Takeaways

  • Investing in rising interest rates can be successfully done by investing in companies that will do well with higher rates—such as brokers, tech and healthcare stocks, and companies that have a large cash balance.
  • Investors can also capitalize on the prospect of higher rates by buying real estate and selling off unneeded assets.
  • Short-term and floating rate bonds are also good investments during rising rates as they reduce portfolio volatility.

1. Invest in Banks and Brokerage Firms

Brokerage firms earn money from the interest earned on cash balances held in client accounts. Naturally, they earn more interest when rates are higher. In the past when the Fed has raised interest rates, financial services companies like banks and brokerages have seen an improvement in interest income and operating profit margins.

2. Invest in Cash-Rich Companies

Cash-rich companies will also benefit from rising rates, earning more on their cash reserves. Investors can look for companies with low debt-to-equity (D/E) ratios or companies with large percentages of book value in the form of cash.

3. Lock in Low Rates

Individuals with adjustable-rate mortgages (ARMs), or companies with adjustable-rate financing of any kind, would be well-advised to refinance with fixed-rate financing, locking in the lowest possible interest rates for the long term. 

4. Buy With Financing 

Individuals or businesses planning major purchases or capital expenditures should consider buying now while they still have the ability to lock in low long-term rates. Purchases made before interest rates begin to significantly rise can result in substantial savings in financing charges and overall long-term costs.

5. Invest in Tech, Healthcare

Companies in the technology and healthcare sectors tend to hold on to greater amounts of profits as retained earnings to reinvest in growth opportunities, rather than paying them out in the form of dividends. Past performance shows that during periods of rising interest rates, the healthcare and technology sectors experienced average gains that outperformed the S&P 500 Index.

6. Embrace Short-Term or Floating Rate Bonds

Bond investors can decrease portfolio volatility during rising-rate environments by moving to bonds with shorter terms to maturity or by purchasing bonds with coupon rates that float in concert with the market rate. 

7. Invest in Payroll Processing Companies

Payroll processors, such as Paychex and Automatic Data Processing, customarily maintain large cash balances for customers in the periods between paychecks, when the money is distributed as payroll. These firms should see improved interest revenues when interest rates rise.

8. Sell Assets

Individuals or businesses with unneeded property or other assets may be able to profit from selling such assets before rates begin to rise. Buyers are likely looking to buy now when they can still lock in low, long-term rates, so they may be willing to pay premiums to acquire needed assets before rates begin going up.

9. Lock in Long-Term Supply Contracts

Rising rates generally mean rising prices as well. Businesses that can lock in long-term contracts with suppliers may be able to enjoy better margins by avoiding increased prices for as long as possible.

10. Buy or Invest in Real Estate

Real estate prices tend to rise with, and often even outpace, interest rates. Buying real estate or investing in real estate investment trusts (REITs) is another way to realize profits from a rising rate environment.

Rising interest rates may sound like a bad thing for those who need to take out a loan or buy something on credit, but investors can profit by planning ahead and purchasing the right types of investments.

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