When interest rates rise, the stock market tends to decline. The reason is that rising interest rates are a sign that central banks are trying to cool off an overheated economy, usually due to inflation. IN that environment, fixed-income investments such as bonds and cash, which carry lower risk than equities, give investors a larger reward for playing it safe.
Playing it safe makes sense if you're at a stage where wealth preservation is your primary objective. However, if you're still growing your portfolio, the risk of playing it too cautiously may cause you to fall behind on your larger goals.
The key could be a diversified portfolio. And that means continuing to invest in stocks selectively. When interest rates rise, that selectivity means shifting your focus away from growth stocks to value and income stocks.
In some cases, this means focusing on sectors of the economy that benefit from rising interest rates, which generally means financial stocks such as banks and insurance companies. It can also mean investing in defensive stocks – defined as those of companies that offer products and/or services that will be in demand regardless of rising.
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