When rates rise the present discounted value of this earning stream falls so the value of the share is worth less. Hence, the stock price falls for interest sensitive stocks. This is the same reason bond prices fall when rates rise. The present value of the bond s coupons is worth less today when rates rise. Therefore, investors can expect a drop in their portfolio value when interest rates rise and when inflation fears surface.
Growth oriented funds, small cap funds, and dividend funds are the most affected.
In the longer run, value-oriented funds and blue chip, large cap funds tend do better. Next time, we ll discuss how interest rates affect the other side of the investing universe bonds and fixed income instruments. Levi Folk and Richard Webb are editors of the Fund Counsel newsletter , a monthly publication for independent mutual fund investors.