Interest Rate Risk and Your Portfolio

Interest rates are a powerful force in the financial markets. They influence not only borrowing costs for consumers and businesses, but also the value and performance of many investments. Interest rate risk is the possibility that changes in interest rates—whether up or down—will negatively impact your portfolio’s value, income potential, or overall performance.

While often seen as a risk primarily for bondholders, interest rate movements can ripple across all areas of your portfolio, including equities, real estate, and even alternative investments. At Optimize, we help you understand how interest rate risk affects your investments and how we design portfolios that help manage this dynamic within your broader financial plan.

How Interest Rate Risk Shows Up in Portfolios

The most direct impact of interest rate risk is felt in fixed income investments like bonds and GICs. When interest rates rise, the value of existing bonds tends to fall because newer bonds offer higher yields, making older, lower-yielding bonds less attractive. This can lead to short-term declines in the value of bond holdings, even if the bonds themselves are high quality.

Conversely, when interest rates fall, the value of existing bonds tends to rise, as their yields become more attractive compared to new, lower-yielding bonds.

But the effects of interest rate risk are not limited to bonds. Rising rates can also influence:

• Equities, particularly growth stocks, which may see valuations pressured as future earnings are discounted more heavily.

• Real estate and infrastructure investments, which can be affected by higher borrowing costs and changing income expectations.

• Income-focused investors, who may experience changes in the attractiveness of fixed income versus dividend-paying stocks.

Why Interest Rate Movements Matter for Your Financial Goals

Interest rate risk is particularly important to consider when planning for income needs, such as during retirement, or when holding larger allocations to fixed income for stability. Unexpected interest rate moves can temporarily reduce your portfolio’s income or capital values, affecting your sense of financial security.

At the same time, periods of rising rates can create new opportunities, such as reinvesting maturing bonds at higher yields or benefiting from improved returns in cash and short-term fixed income holdings.

How Optimize Helps You Manage Interest Rate Risk

At Optimize, we take a balanced, thoughtful approach to managing interest rate risk within your portfolio:

• Diversifying across fixed income maturities.
  We use a mix of short, medium, and long-term bonds to reduce sensitivity to sudden interest rate shifts, while still seeking attractive income.

• Maintaining global exposure.
  By investing in a range of fixed income markets and sectors, we help reduce concentration to any one country’s interest rate policies.

• Blending fixed income with equities and alternatives.
  Your portfolio is designed to ensure fixed income plays its role as a stabilizer, while equities and alternatives support growth and inflation protection.

• Staying focused on your goals, not short-term rate predictions.
  Rather than trying to guess the direction of interest rates—an exercise even professionals struggle with—we focus on building resilient portfolios that can perform through different interest rate environments.

Turning Interest Rate Risk into a Managed Part of Your Strategy

Interest rate risk cannot be eliminated entirely. But with careful portfolio construction, diversification, and ongoing management, it can be a manageable, predictable part of your investment journey.

At Optimize, we help you see interest rate risk as just one of many factors we balance on your behalf—ensuring that your portfolio remains aligned with your goals, your income needs, and your broader financial plan, regardless of where rates go next.