‘I’d like to do it myself’: Where do I invest $50,000 as the Fed will cut interest rates? I’m 38 and have a high risk tolerance. 

Retail Investor

Related: ‘It’s a momentous moment’: I’m selling my house. With the Fed poised to finally cut interest rates, is this the perfect time?

Dear Investor,

You have a smorgasbord of opportunities.

You say you have a high risk tolerance, but that does not mean you should invest your entire $50,000 in high-risk stocks. The risk-tolerance metric is simply an indication of how able you are to ride out the highs and lows of the market without panicking. You’re relatively young, so you have time to make long-term investments.

As you imply, the Federal Reserve last hiked its key federal funds rate in July 2023 to a range of 5.25% to 5.5%. It’s due to do lower them again — by 25 basis points or 50 basis points, according to most predictions — on Wednesday at 2 p.m. EST. A decreasing interest-rate environment will, eventually, help change the landscape for stocks and, hopefully, real estate.

If you’re concerned about short-term fluctuations, Martin Schamis, vice president and head of wealth planning at Janney Montgomery Scott, suggests employing a dollar-cost-averaging strategy, where you divide the amount to be invested into equal size contributions and then invest them over a longer period of time, “is a good way to limit volatility.”

‘While rate cuts have historically been positive for stocks in general, they might provide a greater boost to small-cap companies.’

— Fidelity Investments

Alonso Munoz, chief investment officer of Hamilton Capital Partners, says that although equities have done well this year overall, specifically tech stocks, you could consider allocating a portion of your funds to equities, as earnings have been strong, “and a lower rate environment could help broaden out the equity market rally outside of the mega-cap growth companies.”

“Rate cuts have historically been a positive for the stock market broadly — a relationship that’s held true, on average, regardless of whether the economy is in a recession or not,” says Fidelity Investments. Stocks tend to underperform prior to a first rate cut in a recession but typically outperform over the following 12 months in both recessionary and nonrecessionary markets.

On the equity side, Paul Karger, co-founder and managing partner at TwinFocus, suggests equities that benefit from lower rates and/or pay higher dividends. “We like utilities due to the amount of power needed for the AI world,” he says. “Small-cap stocks and commodity producers also benefit from lower borrowing costs. Lower rates can lead to a weaker dollar.”

“While rate cuts have historically been positive for stocks in general, they might provide a greater boost to small-cap companies,” Fidelity adds. “Small companies generally carry more debt than larger companies, which means they’ve felt the pinch of higher rates more than their larger brethren — and could benefit more from relief on rates.”

Small-cap companies and REITS

On the fixed-income side, you and other retail investors want to lock in current rates before the nest rate cycle begins in earnest. Karger advises locking in longer-duration bonds now before rates fall — by buying 10-year Treasury bonds, for example, or “buying municipal bonds and other safe bonds which benefit (price increase) from a decline in rates.” 

Karger says that real-estate investment trusts are more attractive than bonds due to higher relative yields, noting that they provide both diversification and liquidity, which means you can access your cash more easily than with many other investments. You can read more about these four REIT stocks that pass a strict quality screen, with dividend yields up to 6.19%.

Denise Chisholm, Fidelity’s director of quantitative market strategy, believes the real-estate and financial sectors look potentially compelling and are likely pricing in too much bad news. “This year has been unusual because these sectors have instead lagged, performing roughly the way I might expect before an interest-rate hike,” she says.

Real-estate investment trusts are more attractive than bonds due to higher relative yields, noting that they provide both diversification and liquidity

— Paul Karger

Treasury bonds could even outperform stocks and other bonds. “Despite rising federal government debt, U.S. Treasurys remain one of the least risky investments available, and investors are likely to continue to look to them in times of economic uncertainty,” Fidelity says. “For that reason, Treasury bonds have historically thrived when the economy has contracted.”

Brace yourself for a bumpy ride in the run-up to November’s presidential election. In a statement last week, Rick Rieder, BlackRock’s chief investment officer of global fixed income, said that given “U.S. debt/Treasury supply dynamics and a particularly impactful period for volatile seasonal factors in economic data, there is a good deal we don’t know about the year ahead.”

Remember that diversity is king, especially in these uncertain economic times. 

More columns from Quentin Fottrell:

‘We’re happily married, mediocre gay men’: We’re 58, earn $160,000 and saved $2.2 million. We grew up poor. Our families treat us like ATMs. Are we OK?

‘It’s the saddest thing’: I’m happily retired and my friends in their 60s want to know how I did it. Should I tell them my secret?

I’m a veteran, 53, with 6 degrees and $245,000 in student debt. I plan to discharge my loans due to my disability when I hit $1 million. Is this immoral?

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