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The U.S. Federal Reserve will hold a policy meeting Wednesday and Thursday this week. The meeting has incited a media frenzy as officials will discuss if now is the appropriate time to impose an interest rate hike.
All of the buzz has investors wondering: How do rising interest rates affect the stock market?
To be a prepared investor, it's important to understand how rising rates affect different assets. Here's how four popular asset classes perform when interest rates go up...
How Do Rising Interest Rates Affect the Stock Market? Investment No. 1: REITs
Real estate investment trusts (REITs) are companies that own or finance income-producing real estate properties. They're typically associated with shopping malls, offices, hotels, and apartment buildings. REITs are high-yield investments that pass 90% of their profits to shareholders.
According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, a Fed interest rate hike will not kill all REIT returns.
"Contrary to what a lot of people believe, REITs have historically done well when the cost of money is increasing," said Fitz-Gerald earlier this year. "REITs are not the investing zombies many investors think when it comes to rising rates."
REITs usually perform well when the 10-year Treasury bond yield is high. The yield has hovered above 1.5% over the last year. The Dow Jones REIT Index is up 4.1% over the same period.
Between 1994 and 2013, there were nine separate periods when the U.S. Treasury yield was more than 1%. During one stretch in 2009, REITs saw their highest average return of 50.1%.
But you can't just bank on 10-year Treasury yields climbing because the Fed raised rates. You see, the 10-year bond is affected by more than just interest rates.
That brings us to the next investment...