How to Prepare Your Portfolio for Higher Interest Rates

Brian Perry, The Motley Fool
·5-min read
How to Prepare Your Portfolio for Higher Interest Rates

In order to understand why higher interest rates impact the stock market, you need to remember what an investment is and how it is valued. The higher the discount rate you use, the less valuable the investment, and vice versa. Determining a discount rate for valuing the stock market is not an exact science, but most market participants use a combination of two inputs: the risk free rate and the equity risk premium (ERP.) The risk free rate reflects the safest investment you can make, and is generally proxied by the yield on the 10-year Treasury bond.