Rising interest rates are good news to holders of savings and money market accounts, but generally bad for people who want to buy or sell real estate. Changes in interest rates can also affect investors in fixed-income securities such as bonds and bond funds. In an environment where interest rates are expected to rise, it is important to consider strategies that may help protect you from volatility and declining values.

Interest rate changes have a big impact on how much a bond is worth. Bond prices tend to move in the opposite direction of interest rates. If rates go up, bond prices usually go down. If rates fall, bond prices normally rise. It is important for investors of fixed-income instruments to recognize this inverse relationship, but there are a number of strategies that can be used to diversify assets and help you reduce the negative effects.

Shorter maturities tend to be less sensitive to interest rate changes. In a rising interest environment, you might want to consider moving your assets into short-term securities or a bond fund that invests in these securities.

Rising interest rates often occur during times of rapidly expanding economies. A fast-growing economy usually translates into increasing earnings for companies and leads to improved credit ratings on their bonds. As a result, corporate bond prices may be somewhat less sensitive to interest rate changes. Different types of corporate bonds include high-grade corporate and utility bonds, as well as high yield bonds.

A good way to level the playing field is to utilize the "dollar-cost averaging" strategy. Dollar-cost averaging simply means investing some pre-determined amount consistently, at regular intervals over a period of time. When interest rates rise, and share prices of bond funds, for example, decline, you are buying more shares at your regular interval. Conversely, when share prices are rising, you buy fewer shares.

Consistently purchasing shares at various prices, allows you to buy more when the price is more attractive, thereby reducing your average cost per share. You can easily employ the dollar cost average strategy by setting up an automatic investment plan through your Financial Advisor.

While increased economic activity tends to hinder bond performance, it can bolster stock performance. So you can attempt to offset potential price declines in the bond portion of your portfolio by blending in some equities.

If you do not feel comfortable managing your own stock portfolio, there are numerous stock mutual funds that can handle the portfolio selection and management for you. There are many different categories of stock or "equity" funds, including growth, growth and income, capital appreciation, balanced, and a wide variety of sector funds. Again, your Financial Advisor can help you determine which mix is right for you.

Fluctuations in interest rates should not be the only consideration in making important investment decisions. You should always include your specific, long-term investment objectives before responding to one economic indicator. Focus on your investment's total return-appreciation of share price, minus fees, plus interest or dividend income. It is important to consider all of these factors as well as the tax* ramifications of asset transfers within your portfolio when considering portfolio adjustments.

Emily S Hazlett is Vice-President:Investments at ENB Insurance Agency, Inc. a wholly owned subsidiary of Evans National Bank.

* ENB Associates Inc. does not provide tax or legal advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences.

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