4 Good Investments When Interest Rates Rise
Interest rates have slowly climbed from their recent historic lows, and they're likely to keep on climbing for some time. As interest rates go up, many common types of investments will suffer -- but others will rally. Here are some assets that do particularly well when interest rates rise.
While most long-term bonds plummet in value as interest rates climb, TIPS are designed for just such an environment. The interest rate on a TIPS bond doesn't change if rates rise, but the principal increases with inflation (and inflation nearly always goes hand-in-hand with rising interest rates). So while you'll still be getting the same interest rate payout on your TIPS, that payment will be based on the new, higher principal. And once the TIPS bond matures, you'll get back your principal at the increased level thanks to the inflation adjustments.
On the other hand, if you guess wrong and run into a period of deflation, the principal on your TIPS will shrink instead of growing. The good news is that once your TIPS bond matures, if the bond's principal at that point is lower than your original principal, you'll still get your entire initial investment back.
Source: Fool.com
