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By Jason Stipp and Christine Benz | 09-05-2013 02:00 PM

How Rate Sensitive Are Your Equities?

Investors needn't dump their high-quality dividend-payers but should consider adding other types of stocks to temper their equity allocation's interest-rate sensitivity, says Morningstar's Christine Benz.

Jason Stipp: I'm Jason Stipp for Morningstar.

The recent interest rate shock has concerned a lot of investors over their fixed-income holdings, but investors should also pay attention to how rising rates might affect their equity holdings as well. Here to offer some tips and insights is Morningstar's Christine Benz, our director of personal finance.

Thanks for being here, Christine.

Christine Benz: Jason, great to be here.

Stipp: When we're looking at the effect of interest rates on our portfolios, in some areas it's much easier to see the effect; in some areas it's less easy. The easiest place, you say, to see the effect of rising interest rates is really high-quality bonds or Treasuries.

Benz: That's right, and that's because the impact of rising rates is pretty easy to measure, pretty easy to see. If you have, say, a Treasury bond, it has no credit risk; all it has is that interest rate risk. So, it tends to be very responsive to interest rate changes.

With stocks, on the other hand, you see a lot more variation. They are responding to a lot more factors, including their own fundamentals--not just what's going on with rising interest rates and with the economy at large.

So, the impact isn't nearly so direct with stocks.

Stipp: Christine, when we're seeing a rising rate environment, what does that usually mean for companies, and hence for the stocks that we hold?

Benz: Well, oftentimes it means that the economy is growing at a really nice clip, and that is why interest rates are rising.

On the flip side, though, rates can rise too rapidly, and that can have a tendency to have a cooling effect on the economy. So, it's not necessarily always the same effect.

Stipp: What has the S&P done historically when we've seen these periods where rates are starting to tick up?

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