What should be done with funds when anticipating rising interest rates?

When anticipating rising interest rates, the most prudent approach is to sell bonds and keep cash. This strategy stems from the inverse relationship between bond prices and interest rates: as interest rates rise, the prices of existing bonds typically fall. Holding cash during this period allows an investor to avoid losses from declining bond prices and positions them to invest in new bonds at higher interest rates once the first downturn is over.

Maintaining cash during this time also provides liquidity, enabling investors to capitalize on opportunities as they arise, particularly as new bond issuances offer better yields. This approach is particularly beneficial in environments where rising rates are expected, as it safeguards the principal amount while waiting for favorable investment conditions.

Investing in real estate or providing loans to other investors may not be directly related to managing bond risk in a rising rate environment. Real estate can be affected by interest rates, as higher rates can increase borrowing costs, potentially leading to a decrease in demand and property values. Similarly, providing loans might increase risk exposure in a rising rate climate. Thus, keeping cash during anticipated hikes in interest rates is a strategically sound decision for protecting investments.