Question

You are an investor between stocks and bonds. In which one will you invest when interest rates go up? Explain.

Answer 1

Interest rates and bonds have an inverse relationship: When interest rates rise, bond prices fall, and vice versa.

In contrast to bonds, interest rate changes do not directly affect the stock market. However, Fed actions can have trickle-down effects that, in some cases, impact stock prices. Still, there’s no guarantee that a rate hike will negatively impact stocks. Typically, rising interest rates occur during periods of economic strength. In this scenario, increased rates often coincide with a bull market.

With a balance of stocks and bonds, your portfolio may be better positioned to maintain more stability despite an interest rate increase. However, if one has to invest in either stocks or bonds then invest in stocks.