Investment strategy before interest rate cut

Interest rates have been rising for two years, the mortgage burden is getting heavier and heavier, many friends with properties have also complained about the pain of 2024 interest rate cuts are expected to come, as a smart investor, we must adjust our strategy and deployment before the interest rate cuts to seize the investment opportunities under different market conditions.

Since July last year, the Federal Reserve has maintained interest rates at 5.25% to 5.5%, and the market generally expects two to three interest rate cuts in the second half of this year. If the interest rate cuts are realized, the first to benefit from the homeowners who have a mortgage in place.

In order to cope with high inflation, the Federal Reserve has decided to raise interest rates 11 times in the one-and-a-half-year period from March 2022 to July 2023, with a cumulative rate of 550 points. Since September last year, the U.S. FOMC also continued to maintain interest rates unchanged for four times, many market participants regarded as a signal of interest rate cuts, that is, the interest rate hike cycle is officially approaching the end of the U.S. interest rate cuts of course, is the financial market's top priority for the individual investor, the configuration of their investment portfolio and deployment is also an important consideration.

In the past 2 years, banks have launched a number of fixed deposit offers to attract guests, the highest one-year fixed deposit interest rate of more than 5%, fixed deposit has become a lot of risk-tolerance ability is lower, the investment attitude of conservative investors' capital safe haven. However, with the pace of interest rate cuts gradually approaching, deposit rates have begun to fall, high interest rate deposits of the era or will be over, if investors want to continue to collect interest month after month, it is necessary to adjust the existing investment portfolio to cope with the impact of interest rate cuts.

Interest rate cuts may come true Adding and subtracting investment portfolios

Increase bond allocation:

Prices of existing bonds are generally trending upwards as interest rates have become relatively more attractive due to falling interest rates. The market is looking for inflation to come down in 2024, so investors can gradually add interest rate-sensitive sovereign or highly rated bonds to capitalize on the boost to bonds from the interest rate reduction cycle. If most of the current asset allocation is still in cash or fixed deposits, you can consider increasing the proportion of the bond portion of the investment, but it should be noted that the trend of rising bond prices will not continue for a long period of time, when the interest rate of the newly issued bonds is similar to the existing bonds, the price of the old bonds will also be stabilized.

Deposits are less attractive:

Deposits and cash are relatively less attractive in a reduced interest rate environment. Take the investment returns of the past 22 interest rate reduction cycles as an example, 12 months after the Federal Reserve Board began to reduce interest rates, cash performance is significantly lower than the stock and bond markets lagged behind, the average performance of stocks is 9% higher than the holding of cash, in the past two years of high interest rate environment, many investors may think of cash as the king of the cash or have the flexibility of the short-term deposits, is very suitable for the establishment of a short-term reserve to meet any short-term or emergency expenses. However, as a longer-term wealth enhancement or financial goal, such as retirement savings, children's education, etc., it is not the wisest choice from a long-term perspective. According to Schroders' data analysis, from 1926 to 2022, regardless of whether the investment period is 1 month or 20 years, the probability of cash beating inflation is only about 50% to 60%, but as long as the investment period is stretched to 20 years, the probability of the stock market beating inflation can reach 100%.