Smart investors are keenly aware that the Fed has raised interest rates in an effort to fight inflation. The rate hike is expected to encourage savings in the short term, so how do these higher interest rates impact long-term investments held in your retirement account?
The affect that interest rates can have on a retirement portfolio often depends on the assets within the portfolio. Because some investments are more likely to benefit from higher interest rates than others, a diversified portfolio can be a safe option to make a retirement account rate-hike proof.
How Higher Interest Rates Affect Retirement Portfolios
Understanding how interest rates work is essential to realizing how an increase can affect different investments. Interest rates are essentially the cost of borrowing money. So retirement accounts that contain more savings investments are more likely to see a rise with an increased interest rate. Meanwhile, portfolios with stocks, bonds or mutual funds may see an immediate dip as the market adjusts to the higher rate.
Savings accounts are more prone to benefit because higher interest rates for lenders often translate to higher rates for savings accounts. This means that options like money market funds, bond mutual funds, and certificates of deposit are more likely to see improvements.
You may find that some savings options allow for more investment flexibility than others. For example, many money market accounts have no fees for early withdrawal, while terms for a CD typically range from three months to five years, and investors will be penalized for early withdrawal. Some investors may choose to utilize short-term CDs while interest rates rise.
Stocks and bonds
In retirement portfolios that are heavier in stocks, the effects of higher interest rates often vary. For example, immediately after an interest rate hike, stocks are more likely to fall as sellers take advantage of the increase. However, the long-term effect is often an increase in returns.
Investors should evaluate their retirement goals when considering a portfolio of stocks. An investor who is 30 years away from retirement will likely have different objectives than someone who is three years away.
Diversification with Alternative Assets
Diversifying a retirement portfolio with alternative investments can help hedge against interest rate changes. Alternative options include real estate, physical commodities like gold, pieces of companies, various notes, cryptocurrencies, and much more.
While inflation will also affect these assets in different ways, diversification outside of the traditional investment markets could be more likely to shield investments against wild market fluctuations.
How to Invest a Retirement Portfolio in Alternative Assets
Digital Trust offers investors a way to diversify outside mainstream markets—giving customers the ability to access assets usually reserved for the ultra-rich and financially savvy.
This powerful platform offers many straightforward approaches to alternative investing, making it easy to access and understand. For investors who may be concerned about how market conditions might affect a retirement portfolio, see how Digital Trust can bring peace of mind today.