Morningstar's Falkof: 'Diversified Investors Need Not Fear Rising Rates'

Monday, 25 Aug 2014 07:33 PM

By Dan Weil

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Many investors are scared that their net worth will take a tumble when the Federal Reserve finally raises interest rates.

But that need not be the case, says David Falkof, an investment consultant for Morningstar Investment Management.

"Our analysis suggests that for well-diversified investors, fears of a portfolio meltdown are misplaced," he writes on the firm's website. "Diversified investors need not fear rising rates."

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

Looking back to 1926, Falkof and his colleagues found that a multi-asset portfolio with a 20 percent allocation to equities on average would have generated positive returns across all the historical interest-rate environments.

"By allocating a portion of the portfolio to equities and cash, both of which have performed well in periods of rapidly rising rates, the conservative model provided positive returns despite losses in its bond allocation," Falkof says.

Some other market participants don't think a rate hike will hurt stocks either. "When the Fed eventually begins to raise the [federal] funds rate next year, that in our view is not the death knell of this rally," Federated Chief Equity Strategist Phil Orlando told CNBC.

"The market is going to appreciate the fact that [this] . . . must mean the economy is starting to normalize for the first time in seven or eight years."

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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