Designing an 'Asset Defense Portfolio' in an Era of Rising Interest Rates [Considering the Optimal Allocation of Cash, Bonds, Stocks, and Gold]
Hello, this is Sibil.
The policy interest rate has reached 1%. There is a possibility it will head toward 1.5% or higher in the future.
How do we protect our assets in an era of rising interest rates?
Today, I will explain an asset defense portfolio for an era of rising interest rates, along with my own personal practices.
Reconfirming the impact of rising interest rates on each asset class
Let’s organize ‘what goes up and what goes down’ in an era of rising interest rates.
Cash/Short-term bonds (Favorable)
Rising interest rates mean the yields on cash and short-term bonds increase.
Dollar MMFs, government bonds for individuals, and time deposits at online banks. The yields on these will rise.
The ‘cost of holding cash’ decreases as interest rates rise.
Long-term bonds (Unfavorable)
Interest rates and bond prices have an inverse correlation.
When interest rates rise, the prices of existing long-term fixed-rate bonds fall.
The longer the duration (interest rate sensitivity), the greater the price decline.
Stocks (Complex impact)
Short-term: Rising interest rates reduce the relative attractiveness of stocks (because government bond yields rise).
Long-term: Stocks of companies with growing earnings will overcome rising interest rates and generate returns.
In particular, ‘growth stocks’ are vulnerable to rising interest rates. ‘Value stocks, high-dividend stocks, and financial stocks’ are relatively resilient.
Real estate (Unfavorable)
Rising mortgage rates lead to a decrease in demand for real estate purchases, creating downward pressure on real estate prices.
In particular, ‘real estate purchased with variable-rate loans’ is susceptible to a double blow, including increased loan repayments.
Gold (situation-dependent)
Gold tends to have an inverse correlation with ‘real interest rates (nominal interest rates minus inflation rate)’.
Interest rates are rising, but inflation is also continuing.
If real interest rates remain negative, the value of gold is likely to be maintained.
My portfolio’s ‘response to rising interest rates’
I will evaluate my current portfolio from the perspective of rising interest rates.
Cash 65% (roughly half USD MMF and half JPY MRF)
This is the asset class that benefits most from rising interest rates.
The yield on USD MMFs remains at a high level. In a phase where short-term US dollar interest rates are around 5%, an annual yield of about 5% was being earned.
If Japanese interest rates rise, the yields on yen-denominated short-term bonds (government bonds for individuals, time deposits) will also rise.
There is criticism that ‘65% cash is an opportunity loss,’ but in a rising interest rate phase, the yield on cash increases, reducing the opportunity loss.
Gold ETF 15%
As long as inflation continues, the value of gold is likely to be maintained.
As long as Japan’s real interest rate (nominal interest rate of 1% minus inflation rate of 2-3%) remains negative, the downward pressure on gold is limited.
It also continues to function as a hedge against geopolitical risk.
BTC 10%
In a rising interest rate phase, BTC is susceptible to risk-off selling.
However, as long as skepticism toward the reliability of fiat currency continues, the potential for long-term value preservation remains.
By adhering to the ‘10% cap,’ I am limiting the impact that a decline in BTC has on the portfolio as a whole.
Stocks 10%
I am currently maintaining a low ratio.
I am preserving ammunition to ‘buy more’ when rising interest rates trigger a correction in the stock market.
*There is a possibility that I will close out stock positions before the US midterm election vote counting.
‘How to Think About Portfolio Adjustment’ in an Era of Rising Interest Rates
Adjustment Point 1: Reduce long-term bonds, increase short-term bonds
Long-term fixed-rate products (long-term bonds, long-term fixed-rate insurance products) tend to lose value during periods of rising interest rates.
Instead, increase short-term bonds, money market funds (MMFs), and floating-rate products.
This is the concept of ‘shortening duration’.
Adjustment Point 2: Dividend stocks and financial stocks over growth stocks
In a rising interest rate environment, growth stocks tend to be devalued due to the calculation of discounting future earnings to present value. On the other hand, dividend stocks and financial stocks (banks, insurance) are more likely to benefit from rising interest rates.
Concentration in tech and AI-related growth stocks increases risk during periods of rising interest rates.
Adjustment Point 3: Continue NISA contributions
If the stock market corrects due to rising interest rates, an opportunity to ‘buy cheap’ is created.
Continuing dollar-cost averaging contributions, regardless of how interest rates move, leads to maximizing long-term returns.
Adjustment Point 4: Utilize Japanese Government Bonds for Individuals
Japanese Government Bonds for Individuals (10-year floating rate) are advantageous in a rising interest rate environment. Since the interest rate is reviewed every six months, the yield increases as the policy rate rises. They offer principal protection and high liquidity.
By shifting a portion of your emergency fund into Japanese Government Bonds for Individuals (10-year floating rate), you can protect your principal while benefiting from rising interest rates.
Preparing for the most difficult scenario: ‘Inflation + Rising Interest Rates’
What Japan is currently facing is a combination of ‘inflation and rising interest rates’.
This is one of the most difficult scenarios to deal with in asset formation.
Why it is difficult
Inflation → Real value of cash decreases → Stocks and real estate are advantageous
Rising interest rates → Downward pressure on stocks and real estate → Cash and short-term bonds are advantageous
When these two occur simultaneously, there is no single ‘correct answer’.
My answer: Overcoming it through diversification
Cash (advantageous for rising interest rates), stocks (advantageous for inflation, long-term), gold (inflation + geopolitical hedge), and BTC (fiat currency hedge).
By combining different asset classes, you create a structure that can handle movement in either direction.
Conclusion
There is no ‘perfect answer’ for portfolio design in an era of rising interest rates.
However, the principles of ‘reducing long-term bonds, increasing short-term bonds, maintaining diversification, and continuing to invest’ remain unchanged.
Asset defense is not about ‘predicting and betting,’ but about ‘creating a structure that can handle whatever happens.’
Have you adjusted your portfolio in response to rising interest rates? What changes have you made?
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