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It's Your Money  

Preparing your portfolio for dropping interest rates

Ready for rates to drop?

With the high likelihood of interest rates decreasing in the foreseeable future, Canadian investors are faced with a pivotal moment in their investment journey.

While declining rates may present opportunities for certain asset classes, they also pose challenges and require careful consideration.

Here are some key investment considerations that investors should be contemplating for their portfolios as they navigate the shifting economic landscape:

Diversification across asset classes: As interest rates decline, traditional fixed-income investments such as bonds may experience lower yields. In response, investors should consider diversifying their portfolios across a range of asset classes to mitigate risk and capitalize on opportunities. This may include allocating a portion of their portfolio to equities, real estate investment trusts (REITs), commodities, and alternative investments such as infrastructure or private equity.

Reassessment of fixed-income holdings: While declining rates may lead to capital appreciation for existing bond holdings, future returns are likely to be lower as yields decrease. Investors should reassess their fixed-income allocations and consider adjusting their duration exposure and credit quality to optimize their risk-return profile. Additionally, exploring alternative fixed-income strategies may offer potential avenues for enhanced yield in a lower-interest-rate environment.

Consider dividend-paying stocks: With the prospect of lower bond yields, dividend-paying stocks may become increasingly attractive to income-oriented investors seeking alternative sources of yield. Companies with a track record of stable dividends and strong fundamentals may provide a reliable stream of income and potential for capital appreciation over the long term. However, investors should exercise caution and conduct thorough due diligence to ensure the sustainability of dividend payments and the resilience of the underlying businesses. And more importantly, don’t become “blinded” by a dividend yield without considering the overall stock’s performance.

Opportunities in growth-oriented sectors: Declining interest rates may also create opportunities in growth-oriented sectors such as technology, healthcare, and consumer discretionary. These sectors tend to benefit from lower borrowing costs and may experience increased investor interest in anticipation of future earnings growth. However, investors should remain vigilant and assess valuations carefully to avoid overpaying for growth stocks amid heightened market volatility.

Consideration of inflationary pressures: While the focus may be on declining interest rates, investors should also be mindful of potential inflationary pressures in the economy. Inflation erodes the purchasing power of fixed-income investments and can have a significant impact on investment returns over time. As such, incorporating inflation-hedging strategies such as inflation-protected securities, real assets, and commodities into their portfolios may help investors preserve their wealth and maintain purchasing power in the face of rising prices.

Long-term perspective and discipline: Amidst changing market conditions and economic uncertainty, maintaining a long-term perspective and discipline is paramount for investors. Attempting to time the market or chase short-term trends can lead to suboptimal outcomes and undermine investment objectives. Instead, focus on building a well-diversified portfolio aligned with your risk tolerance, investment goals, and time horizon, and stay the course through market ups and downs.

This article is not meant to provide specific investment advice but instead to outline some of the many possible outcomes investors should consider for their portfolios with the high probability of an upcoming shift in the interest rate environment.

As interest rates potentially begin to decline, investors that take the time to consider the impacts will be well positioned for the future.

By taking the time to consider what this shift in rates could change for different asset classes, investors can navigate the changing tides of the market with confidence and resilience.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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