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How rising interest rates can affect your portfolio

Last week the US Federal Reserve hiked interest rates for the sixth time since the GFC to 1.50%.

Interest rates are the most important investment benchmark, as the rate of return which can be earned in stocks is always compared to the yield on bank deposits and fixed income. A rising interest rate environment therefore means that stocks will be worth slightly less in the future then they are currently worth, as a result of a higher yardstick to compete against.

While the Australian economy has been a bit slower than the American economy lately, rates are still expected to rise in the future, which will put pressure on stocks. After all, the Australian economy won’t remain stalled forever.

What’s the best way to protect yourself from declines in the stock market?

The most important thing you can do as an investor is ensure that you don’t overpay for your investments and conservatively value companies. It’s always better to play it slightly safe, than be sorry. Pick stocks that are conservatively valued and which have attractive future earnings prospects relative to their valuations.

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Motley Fool contributor Marcello Pinto has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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