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Investor tips for weathering rising rates and market volatility

Wealthstream Advisors financial advisor Katharine George joins Yahoo Finance Live to discuss how investors might approach their portfolios amid market volatility and rising interest rates.

Video Transcript

JULIE HYMAN: Well, with the recent turmoil in the markets and now the Fed signaling more clearly its intention to raise rates, investors might have a lot of questions here about what to do next with their money. Katharine George is joining us now, financial advisor at Wealthstream Advisors as part of our FA Corner. Katharine, thanks for being here. So I'm curious what you were telling your clients going into the Fed meeting. And now coming out of it, sort of what is your message, especially given what we've been seeing in equity markets over the past couple of weeks?

KATHARINE GEORGE: Right, well, it's all related, as you know, Julie. And, you know, the reason that stocks are tumbling is because of the Fed rate increasing rates or potentially increasing rates. And how that affects stocks is that it makes it more expensive for these companies to borrow money. So it could potentially reduce future profits.


But in terms of our clients, it's really just preparing for any market correction, which could happen at any time and could last any period. And things like that include holding enough cash. That is always the number one item on our clients' agendas, is, how much cash do you have, and is it enough to withstand some of these concerns that come up in the market, and really evaluating your stock to bond mix.

Any time the market reacts in a negative way, it can teach us a lesson as people, as investors. You know, did you react in March of 2020 poorly? Did you sell your stocks? Were you watching the TV every moment of the day? And if so, you know, maybe you have too many stocks in your portfolio or you don't have enough cash on hand to weather the ups and downs of these stock markets. So that's the number one thing we talk to our clients about in preparing for anything that could happen.

BRIAN SOZZI: So is it best to have more cash in your portfolio right now than stocks?

KATHARINE GEORGE: More cash than stocks, no, definitely not. And it all comes down to a few things, the mix of stocks to bonds to cash. It's what do you need to earn to reach your goals, how much risk tolerance you have, and the time horizon of these assets. So if you're saving for a home, then yes, maybe you do need more cash than stocks in your portfolio because this is short-term money. But generally speaking, any long-term investment portfolio should be more weighted toward stocks, of course, depending on your personal situation.

And I would also say that with the fear of inflation rising or even these interest rate concerns, having more stocks in your portfolio is really the only thing that can improve your odds about pacing inflation and making sure that you're actually earning on a real return basis.

JULIE HYMAN: At the same time, of course, Katharine, people are reassessing their risk appetite because of what's going on. And one of the things that you talked about in your note to us was sort of margin borrowing in order to invest in stocks, borrowing against one's portfolio. This is something that has been enormously popular over the past couple of years, as we've seen the market rally. How should people be thinking about that move right now?

KATHARINE GEORGE: Yes, so this has always been a concern of mine personally for a few years now. As markets have continued to move upwards and the volatility has been kind of less so, maybe not in 2020 or-- but regardless of that, stocks have been up. And so people want to borrow against their portfolio because interest rates are so low, and the expected earnings on their portfolio is higher than that rate.

The concern is when you're borrowing against the invested assets of your portfolio, and interest rates are projected to rise, two things happen. So the cost to borrow increases, and the value of your portfolio is dropping. So at a certain point, the people or the company that you're borrowing from is going to say, hey, we need cash because your asset level has dropped and the amount that you borrowed, we can't let you keep borrowing that amount. And it could force you to sell your stocks at a time that you don't want to sell your stock. So in any volatile time, it's really risky, and it might be worth looking at lowering that debt level or just taking it off the table.

JULIE HYMAN: Very good thing to keep in mind in this environment. Thanks so much, Katharine. Katharine George is a financial advisor at Wealthstream Advisors. Thanks so much.