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The news is out, and to many investors it sounds ominous: Interest Rates are on the rise. But John Varao, Chief Investment Officer for ScotiaFunds and one of the leading mutual fund managers in the country, says not to let rising rates relegate you to the investing sidelines, because it’s not necessarily bad news.

First, rates have been at record lows to stimulate the economy out of recession, so a return to normal rates just means that we’re returning to better times. Second, if you stick to the plan you work out with your financial advisor, you can invest so that your money takes advantage of those rising rates. “Increasing rates are only a concern if rising debt costs will be a problem for you,” says Mr. Varao. “Rising rates are generally a positive sign that the central bank sees data that show the economy is strengthening and growing again. And, in a growing economy, you should follow your plan and continue to invest with diversification and discipline. This is the formula that has rewarded investors since the market lows of March 2009.”

For example, even though existing bonds generally do not do well in a rising-rate environment, Mr. Varao points out that newly issued bonds and other fixed-income investments typically offer higher yields to keep pace. Those higher-rate bonds and investments may figure in your diversification strategy in a pre-authorized contribution investment plan or when your current bonds reach maturity. You may also find excellent equity prospects, keeping in mind that individual equities respond in different ways to a rising-rate scenario. “A growing economy is usually good for a company’s earnings and its stock price,” says Mr. Varao. “But these rising rates also mean higher debt costs, so companies that can control debt while finding opportunities will usually fare best. So whether the changing conditions are good or bad for equities depends on the industry and the company. The message to remember is that holding a diversified portfolio of quality companies across a variety of sectors over the long-term is the best approach.

Don’t Get Handcuffed By Short-Term Uncertainty

In spite of the opportunities, however, some investors are bothered by the uncertainty over how far rates will rise, and when. They question whether they should wait to invest in fixed income investments when rates are highest, and whether they should put off investing in equities until rates stabilize. But Bruce Teron, Managing Director of Investments and GICs for Scotiabank, says uncertainty is a fact of life, and it makes more sense to use investing instruments that give you flexibility rather than sit on the sidelines and miss the opportunities.

“In times of interest rate uncertainty, some investors choose more liquid investment products where they’re not locked in,” he says. “For example, a high-interest savings account will give you a decent return today that will increase as rates go up, but will also give you flexibility should conditions change.” There are also strategies that allow investors to get into the market without worrying about changes in rates.

“Trying to guess when rates will rise, and by how much, rarely works,” says Mr. Teron. “Instead, if you hold term deposits, such as GICs, a laddering strategy spreads your investment evenly across a range of successively longer terms – one year, two years, three years and so on – so that a portion matures annually. Each year, you’ll renew at the long-term rate at the top of your ladder, and you will obtain an optimal average rate of return that’s better than holding short-term instruments alone. It takes the guesswork out of trying to choose the best time or the best term for your investment.” So in the short-term, liquid investments such as a high-interest savings account give you acceptable returns and flexibility. But don’t let short-term uncertainty drive your longer-term investment strategy. Investing in times of rising interest rates – or uncertainty of any kind – should be based on the tried and true investing fundamentals of discipline and diversification.

“Uncertainty should always bring you back to the plan you developed with your advisor,” says Mr. Teron. “With a focus on discipline and diversification, you can continue to invest for the long-term.”

John Southerst is an editor and communications consultant specializing in finance and banking. He is a frequent contributor to national media as well as an advisor to private institutional clients.

Regards,

Nino Pasquariello

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