When Interest Rates Change, Should Your Portfolio Change Too?

When Interest Rates Change, Should Your Portfolio Change Too?

In September, the Federal Reserve raised rates by 25 basis points, bringing the federal funds target range to 3.75% to 4.00%. The European Central Bank also raised its key interest rates by 25 basis points, while here in the UAE, the Central Bank raised its Base Rate by the same amount.

These decisions matter beyond the cost of borrowing. Interest rates influence bond prices, the return on cash, company valuations, currencies and ultimately the way different investments behave within a portfolio.

The interesting part is what this means for portfolios that may have been structured under very different market conditions. A portfolio built when interest rates were lower, financing was cheaper and inflation expectations were different may still be perfectly appropriate today. But when the economic environment changes, it makes sense to look again at how that portfolio is structured and here is where asset allocation and diversification become particularly important. We often look at investments individually. Which fund is performing well? Is it a good time for bonds? Should I hold more cash? But the bigger picture is how all these investments work together.

Equities, bonds, cash and alternative investments do not react in the same way to changes in interest rates, inflation or economic growth. Diversification is not simply about having many investments. It is about having a portfolio where different assets have different roles.

For international families, there is another layer to consider. Assets and liabilities are often spread across different countries and currencies. Changes in interest rates or currencies in one market can therefore have an impact somewhere else in their overall financial position.

This does not mean changing a portfolio every time a central bank makes a decision. The more relevant question is whether the original reasons behind the portfolio still make sense. Is the asset allocation still appropriate? Is the level of risk still comfortable? Are the different investments still doing what they were intended to do?

We spend a lot of time asking what the next investment opportunity might be. Sometimes it is equally important to look at what we already have and ask:

Is my portfolio still aligned with what I want to achieve?


Originally published by Paulina Cervera Taboada on LinkedIn.