How to Invest if the Fed Raises Interest Rates

Many shareholders cringe when faced with a dreaded Federal Reserve interest rate hike. They see it as an unnecessary intrusion on the growth of business, while the Fed insists that sometimes rate hikes are necessary to prevent ruinous inflation. While the debate between the Fed and Wall Street rages on, investors need to know how to protect their portfolios against a rate hike.

Instructions

Difficulty: Moderately Challenging

1. Try to predict if the Fed is going to raise interest rates. This usually does not come without a warning from the Fed, which follows a period of uninterrupted growth. If there is "too much" growth, the Fed starts worrying about inflation and threatens to cut.
2. Look at the general mood of investors by investigating financial sites. If bearishness abounds, the rate hike will only deepen the pessimism and you may want to look at defensive stocks. If the rate hike seems like rain on a general parade, you may want to keep your portfolio as it is and wait until the hype passes.
3. Choose defensive stocks if you feel uncertain about the general mood or if the mood is bearish. Defensive companies produce goods that are necessary even in an economic slowdown, such as food and drugs.
4. Take a look at "sin" stocks such as alcohol and cigarette companies. While to some investors, this may be a questionable move from a moral standpoint, these stocks do not decline when there is general pessimism in the market. In fact, in darker times, they tend to rise.
5. Pick a solid dividend stock in a well-performing company. Every investor should have at least one solid dividend stock in a portfolio.
6. Diversify. This is always good advice, but since there is usually uncertainty surrounding the significance of a Fed rate hike, it is good to distribute your risk as evenly as possible

Tips & Warnings

• Research what happened to stocks during subsequent rate hikes. See if conditions indicate history could repeat itself.
• Justify any changes in your portfolio with hard evidence. Stay calm in the storm.
• Don't panic sell or panic buy. Knee-jerk reactions usually cost you a lot of money.