The forecast move by the U.S. Federal Reserve today to hike interest rates is spooking investors into making sure their portfolios are suitably diversified. Something they should be doing already.

Markets are awaiting the Fed’s announcement on Wednesday, which could indicate the first increase in U.S. rates since 2018 as they attempt to combat soaring inflation.

The day has arrived. Investors across the globe have been preparing for the Fed’s decision since the start of the year, which, subsequently, has led to bouts of volatility within global stock markets.

We saw this on Monday with one of the most extraordinary rallies ever on Wall Street. This was the first time since the 2008 financial crisis that the Nasdaq had been down over 4% on the session and closed up. There was a similar occurrence on the Dow Jones index.

Whilst elevated interest rates hike borrowing costs for all businesses, they also make companies’ forecast profits worthless in investors’ valuation models. This is intensified for tech and other growth stocks, with peak earnings not expected for years.

Therefore, investors are now keen to reassess the values of and increase their exposure to energy, industrials, materials and financials sectors.

A number of the valuations of tech and growth stocks are just too high, and it simply doesn’t make sense to have over-exposure to them.

That said, they will not, sensibly, be dumping all growth stocks. Savvy investors recognise that the Covid crisis has led to the development of fundamental trends like online shopping, remote working and gaming.

Indeed, the expected move by the Fed spooking investors into ensuring sufficient portfolio diversification is a good thing. This includes owning stocks from various industries, regions, and risk profiles, as well as other investments such as bonds, commodities, currencies and real estate. This is the optimum way to mitigate risk and make the most of opportunities.

This is a wake-up call by the Fed to investors around the world. Review your portfolio frequently, stay diversified and don’t try to ‘time the market’.

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