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Market volatility due to high-interest rates: Investment strategy

Volatility is an integral part of the stock market. As an investor, you should be prepared for the ebbs and flows of the market. After a good year for the financial markets, 2022 has begun with widespread market decline.

But it's critical to consider the circumstances that have caused this shift and what you can do to stay on course to meet your financial objectives. A number of reasons are responsible for the increasing market volatility, including geopolitical tension due to the war, rising inflation, and the US fed rate hikes.

High-interest rates contribute to market volatility.

The US Fed recently announced interest rate hikes to control the economy from getting overheated (growing too quickly) and resulting in high inflation. Its effect spilled over and contributed to share market volatility. Although interest rates and the stock market have a skewed relationship, they tend to move in opposite ways.

Higher interest rates negatively affect earnings and stock prices. Simplistically speaking, when the interest rates are lowered, the stock market rises; and when there is a rise in interest rates, the stock market falls.

What it means for investors

When the interest rates are hiked, it directly impacts the investors’ psychology before it shows an effect on the stock market. Investors impulsively sell off stocks and move to more defensive and safe avenues.

Investors tend to overlook the fact that volatility brings with it opportunities to rebalance their portfolios. You should assess the long-term impact of the hike before making short-term rash decisions.

Investors should keep in mind two things-


1. Historical data shows that the market bounces back in the long term after dips.

The above table analyses the five most recent rate hike cycles and shows that four out of five long-term indexes gained considerably in the long term. So turbulent times need investors to show patience and turn into buy-and-hold investors to navigate safely and profitably.

2. Diversification is the key during volatile markets. Investing in multi-asset funds spread across geographies allows investors to maximize returns and minimize risks. An expertly curated and actively managed portfolio works to mitigate potential risks and strategically allocate funds to different assets.

Each asset class plays a distinct role in a portfolio. The fundamental rule is that equities offer growth, commodities like gold and silver provide inflation protection, while debt enables stability.

By diversifying your investments across asset classes, you can protect your portfolio from any negative developments in a single asset class, allowing you to get the best risk-adjusted return possible.

At ShiftAltCap, we offer global investment stacks that are focused on delivering consistent returns. Our hassle-free War & Peace stack de-risks your portfolio regardless of changes in macroeconomic conditions via investments in essential services and bonds for cash-rich companies with real-time fund management.

Asset allocations can be rebalanced in response to market volatility or unforeseen changes in circumstances. Talk to us today to safeguard your portfolio and earn better returns.

 

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