Rates will generally begin to rise as an economy rebounds - and when this happens, both short- and long-term fixed-income investors who are caught unprepared may miss out on an easy opportunity to increase their monthly incomes. Therefore, now is the time to begin preparing for this shift in the interest rate environment.

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Look to Stocks

Not all strategies that profit from rising rates pertain to fixed-income securities. Investors looking to cash in when rates rise should consider purchasing stocks of major consumers of raw materials. The price of raw materials often remains stable or declines when rates rise. The companies using these materials to produce a finished good - or simply in their day-to-day operations - will see a corresponding increase in their profit margins as their costs drop. For this reason, these companies are generally viewed as a hedge against inflation.

Rising interest rates are also good news for the real estate sector, so companies that profit from homebuilding and construction may be good plays as well. Poultry and beef producers may also see an increase in demand when rates rise, due to increased consumer spending and lower costs.

Get Your Ladder Ready

Of course, the most common strategy that financial planners and investment advisors recommend to clients is the bond ladder. A bond ladder is a series of bonds that mature at regular intervals, such as every three, six, nine or 12 months. As rates rise, each of these bonds is then reinvested at the new, higher rate. The following example illustrates this process:

Larry has $300,000 in cash earning little interest. His broker advises him that interest rates are probably going to start rising sometime in the next few months. He decides to move $250,000 of his money market portfolio into five separate $50,000 bonds that mature every 90 days starting in three months. Every 90 days, Larry reinvests the maturing bond into another bond paying a higher rate. He may invest each bond into another of the same maturity, or he may stagger the maturities according to his need for cash flow or liquidity.

Beware of Inflation Hedges

Tangible assets like gold and other precious metals tend to do well when rates are low and inflation is high. Unfortunately, investments that hedge against inflation tend to perform poorly when interest rates begin to rise simply because rising rates curb inflation. The prices of other natural resources such as oil may also take a hit in a high-interest environment. This is bad news for those who invest directly in them. Investors should consider re-allocating at least a portion of their holdings in these instruments and investing in stocks of companies that consume them instead.

Don't Forget the Dollar

Those who invest in foreign currencies may want to consider beefing up their holdings in US dollar denominated assets. When interest rates start to rise, the dollar usually gains momentum against other currencies because higher rates attracts foreign capital to investment instruments that are denominated in dollars, such as T-bills, notes and bonds.

Reduce Your Risk

Rising interest rates mean that more conservative instruments will begin paying higher rates as well. Furthermore, the prices of high-yield offerings (such as junk bonds) will tend to drop more sharply than those of government or municipal issues when rates increase. Therefore, the risks of high-yield instruments may eventually outweigh their superior yields when compared to low-risk alternatives.

The Bottom Line

Those who pay no attention to interest rates can miss out on valuable opportunities to profit in a rising rate environment. There are several ways that investors can cash in on rising rates, such as buying stocks of companies that consume raw materials, laddering their bond portfolios, strengthening their positions in the US dollar and refinancing their homes.

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