How to prepare your portfolio for rising interest rates


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Interest rates are on the rise.

The RBA's back-to-back interest rate rises since May, plus indications of further rate rises in coming months, mean that now is the time for investors to consider how further increases in interest rates will impact market volatility.

Here are four tips to protect - and even boost - your wealth portfolio in a rising rate environment.

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1. Consider fixed income

It's important to consider diversifying outside of conventional equities (or shares).

Rising rates signal a period of volatility within markets; putting pressure on equities as the return from fixed income assets (or bonds), which are lower in risk, begin to grow relative to equity markets.

Although rising rates put downward pressure on bond prices, there are opportunities within fixed income markets to receive strong returns over a long period of time if you are willing to hold the bond until its maturity.

2. Keep an eye on the financial sector

The financial sector stands to be a key beneficiary from rising rates. This is because a rise in rates usually supports the underlying revenue of many financial institutions as medium-term bank lending rates tend to widen by more than the cost of short-term funding costs.

In addition, given the regulatory requirements for financial institutions which require strong capital holdings or positions, financials typically also have robust balances sheets.

This combination makes the financial sector one that may provide investors with stable returns throughout a period of heightened market volatility.

3. Look beyond Australia for opportunities

Certain global markets are feeling the effects of inflation more than others, and in turn this is forcing their respective central banks into defensive stances by rising rates. While the European Union and the United States have seen inflation push close to 10%, south-east Asia is yet to reach such high levels.

With this in mind, keep an eye out for opportunities in markets outside of the conventional western markets that may not be as affected by rate hikes.

4. Diversify your portfolio

We've all heard the phrase "don't put all your eggs in one basket". The same goes for wealth portfolios.

The best way to navigate volatility is to hold a diversified portfolio of assets, which depending on your risk profile, should balance investment grade fixed income with riskier asset classes. Index funds are also a great way to diversify your portfolio and reduce single stock risk.

All in all, the rising interest rate environment seems set to stay which means it's never been more important to position your wealth portfolio towards asset classes that benefit from rising rates.

As always, it's important you consider your personal circumstances and do your own research when making investments.

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Donahue D'Souza is the head of investments at HSBC Australia. With more than 20 years' experience in financial markets, Donahue has previously worked with some of Australia's largest retail and investment banks including CommSec and Macquarie Bank. His experience spans sales, product development, trading, investor education and market analysis. Donahue holds a Bachelor of Commerce (Accounting) from the University of Western Sydney and an MBA (Executive) from the Australian Graduate School of Management at the University of NSW and the University of Sydney.