7 Portfolio Tips for a Falling-Rate Environment: Advisors' Advice

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The Federal Reserve’s recent 50-basis-point drop in interest rates — and expectations for further cuts in coming months — have many investors and advisors considering adjustments to portfolios.

Even as the S&P 500 hit yet another all-time high after the rate cut, Morningstar noted that some top fund managers expect impending stock market rallies to differ from the mega-cap tech bull market in recent years, given that lower rates will boost consumers as well as small businesses.

Morningstar also suggested it’s time to look at updating bond portfolios to add some risk by replacing cash with long-term bonds, since cash and short-term fixed income yields are sliding.

We recently asked advisors what changes they’re suggesting for client portfolios now that the Fed is cutting interest rates. Check out the gallery for seven tips to consider. Some responses are edited for length or clarity.

Dinah Wisenberg Brin

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1. Focus on growth.

We recommend our clients begin to increase their exposure to growth-oriented investments. Increasing exposure to both public and private equity can offer higher returns as companies benefit from lower borrowing costs and higher expected valuations.

Furthermore, we are already seeing a loosening of the capital markets as more accommodative interest rate policy is increasing announced deal flow and IPO’s.

In the fixed income space, money market funds are becoming less attractive, so a large cash reserve is less beneficial for income generation. Redeploying cash and short-term Treasurys towards longer-duration bonds can capitalize on falling rates.

However, we are still proponents of private credit, especially direct lending, as this part of the private market offers diversification and should continue to outperform its public equivalents and even high yield debt.

Regardless of the recent announcements, regular portfolio rebalancing is essential to ensure risk levels remain appropriate to achieve each client’s financial goals.

— Christian Salomone, chief investment officer, Ballast Rock Private Wealth

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2. Stay the course.

We’re not recommending any changes to our clients’ portfolios in response to the recent rate cut, or in advance of further planned cuts. Our equity portfolio is designed as an “all-weather” portfolio, meant to harness growth in the markets irrespective of the season or the reason for changes in the economic/financial environment.

And our bond portfolio is dynamic; the fund managers have the latitude to invest the underlying holdings to capitalize on prevailing interest rates, and we’ve seen them do that with aplomb through the rate hiking cycle and in the subsequent months leading up to the recent cut.

— Yusuf A. Abugideiri, CIO, partner, Yeske Buie

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3. Consider advantaged sectors.

With the Fed cutting interest rates, I'm advising clients to adjust their portfolios by rebalancing into growth-oriented equities and sectors that may benefit from lower borrowing costs, such as technology and consumer discretionary.

While the market often bakes in speculation about rate cuts in advance, there are still opportunities to capitalize on the positive momentum lower rates can bring.

At the same time, I recommend reassessing bond holdings, as the drop in interest rates can lead to lower yields.

For income-seeking clients, diversifying into high-quality, dividend-paying stocks or considering alternative income-generating investments can help.

Lastly, maintaining global diversification remains crucial, as rate cuts in the U.S. can affect international markets differently, offering additional opportunities abroad.

— Arielle Tucker, lead planner, Connected Financial Planning

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4. Stick to basics.

Take a boring and bold approach as the Fed begins easing. Focus on what you can control: diversify, keep costs low, stay tax-smart and stick to your long-term plan. Everything else is just noise.

Last year’s talk of a recession and premature rate cuts may have already pulled forward gains and stretched valuations, capturing returns meant for after the Fed’s initial cuts.

— Christopher Magaña, strategic advisor, IMS Capital Management Inc.

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5. Explore buffer ETFs.

Depending on client goals and risk tolerance, buying longer duration Treasurys could be a fit for some. With rate cuts, lengthening the average duration of the portfolio could prove profitable for the investor. Longer duration bonds are more sensitive to interest rate changes than shorter duration bonds.

So in a rate-cutting environment, these longer duration bonds could appreciate more than short-term bonds.

For those who are convinced the equity markets still have some upside, buffer ETFs could be appropriate for certain clients who are seeking tax alpha and tax-deferred growth inside the tax-efficient ETF wrapper.

Rather than investing excess cash in CDs and money market funds where returns would be taxed at ordinary income rates, clients can take cash off the sidelines and invest it, with principal protection and equity upside, to achieve tax-deferred capital gains rates upon the eventual sale of the ETF.

— Andrew Herzog, associate wealth manager, The Watchman Group

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6. Rebalance and take profits.

Recent Federal Reserve interest rate cuts are just one of many factors we've been carefully monitoring. Alongside rate adjustments, we're analyzing two key events that could impact the economy: the upcoming presidential election and potential shifts in political agendas.

With uncertainty looming over tax and trade policies, as well as monetary strategies, we've taken steps to rebalance portfolios and take profits. Our goal is to prepare for possible market volatility by adopting a more conservative investment approach, ensuring that our clients are shielded from risk while still positioned for growth.

We often explain this by saying: we’re moving you away from the fire, but keeping you warm. This strategy has resonated with clients, helping them feel aligned with our vision and confident in their financial security during uncertain times.

— Jon McCardle, president, Summit Financial Group of Indiana

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7. Get defensive.

With fed funds rates going down, the dollar up and inflation holding steady, we are getting defensive with sectors and granular with interest rate-sensitive positions. Asset classes that have historically been negatively correlated with interest rates and the U.S. dollar are where we are positioning client assets. Such as: