What Do Lower Interest Rates Mean for Your Portfolio?

This will be the first interest rate decline since COVID, potentially indicating a period of relief for banks and consumers alike. 

The economy isn’t necessarily “fixed” or going to experience an upturn. In fact, many aspects are still shaky—namely, the overinvestment of private equity in healthcare and real estate and the disconnect between stock performance and company value. 

That said, there is much to be excited about.

The last few years have been challenging. With each price hike, the Federal Reserve seemed to be pulling an emergency break. These limited effective investment options tightened consumer spending and restricted access to credit.

Lower interest rates will change the game.

In today’s article, I want to cover why we focused on fixed income (namely CDs) during the price hikes, what may now be available, and other financial consequences of lowering the interest rate. 

Why Did We Focus on CDs During the Hikes?

When the Federal Reserve first started raising interest rates in 2022-2023, it was clear that the investment strategy had to change. Instead of focusing on bonds and index funds, we largely emphasized a more secure fixed-income option: Certified Deposits (CDs). Not only were they FDIC-insured, but participants were sometimes earning over 5% on their investment—something unheard of for more than two decades.

Meanwhile, rising interest rates meant bond value dropped. As a result, investors had two options: Immediately sell to offset losses or hold until bond maturity or until the interest rate dropped again.

Stocks and variable income assets weren’t fantastic options, either. The market volatility created opportunities for significant losses and left investors vulnerable.

But now that interest rates may be dropping, there are more options available to investors.

Investment Strategies for Lower Interest Rates

The first option is bonds. While these assets aren’t FDIC-insured and have their own risks, bonds are becoming more attractive. Currently, bonds offer attractive returns, sometimes topping 10% or more. If you were to purchase a bond before an interest rate drop, that bond would only rise in value. 

And there are some good options out there. In particular, I’ve been looking at high-yield, lower-risk options like:

• American Beacon Developing World Income Fund-Y Class (AGEYX) has a high expense ratio of 1.16% but a 10.43% year-to-date (YTD) return. 
• GQG Partners Emerging Markets Equity Fund Institutional Shares (GQGIX) has another high expense rate of 0.98% but an even higher YTD of 14.39%
• PIMCO Income Fund Institutional Class (PIMIX), a more conservative bond, has an expense rate of 0.83% and a YTD return of 5.03%.
• Vanguard Wellesley® Income Fund Admiral™ (VWIAX), also more conservative, has the lowest expense ratio of the four, 0.16%, and a YTD of 7.19%. 

Lower interest rates also trigger company growth. During these periods, companies can often take out credit more easily, spurring growth and higher returns. For that reason, variable assets also become more attractive.

It’s important to note that the mentioned bonds may or may not be right for your portfolio. Your specific asset mix will depend on several factors, such as your risk tolerance, time horizon, and financial goals. This example list is not advice. 

Outside of Investments: Where Else You Can Save

What else can investors look at when it comes to lower interest rates? Refinancing current loans, taking out a mortgage at a lower interest rate, and other forms of affordable debt have become possibilities. There are no “must-haves”; however, they can ease financial burdens or become part of an investment plan, depending on your long-term goals.

There are other ways to boost your income:

• Choosing a high-interest bank account or sweep cash management account
• Opening a long-term CD at current rates
• Invest in Treasury Bills

You may also choose to rebalance your portfolio to account for the changes. 

What Next?

Market shifts are complicated, and they aren’t always easy to navigate. While it’s easy to celebrate lower interest rates and recovery from inflation, there are many steps to optimizing a portfolio after a challenging period. 

It can be helpful to get an objective, second opinion from a finance professional. But who can you trust?

If you are looking for financial advisors, I would recommend reading on how to find a financial advisor.