Compassionate Eye Foundation/Steven Errico
The Federal Reserve cut its benchmark rate in September, and is now expected to announce two more cuts before the end of the year.
In prior rate-cutting cycles, there has been plenty of upside potential for investors to boost earnings and balance risk as the Fed adjusts its policy stance.
Still, “all in all this is a much different cutting cycle than what we saw in ’08 and ’09, or during Covid,” said Brian Brady, a certified financial planner and vice president at Obermeyer Wealth Partners, referring to the periods after the 2008 financial crisis and at the start of the 2020 pandemic when rates were rapidly slashed to near rock bottom. Obermeyer Wealth Partners ranked No. 13 on CNBC’s Financial Advisor 100 list for 2025.
Further, while analysts expect cuts, it’s not a given that rates will continue to fall.
“The Fed is cutting into a relatively strong underlying economy, but that can change,” Brady said. “We find all of this to be a balance of humility and optimism even in the face of uncertainty.”
The ‘sweet spot where bonds are attractive’
To that end, “investors can capture higher yields now but also not take undo risk,” he said.
On the fixed income side, that might include locking in U.S. Treasury bonds in “the intermediate range,” with maturities of three, five, and seven years, Brady said. “There is a sweet spot where bonds are attractive,” he said.
Victoria Trumbower, a certified financial planner and managing member at Trumbower Financial Advisors in Bethesda, Maryland, which ranked No. 20 on this year’s CNBC’s FA 100, has a “very defensive” approach already in place with bond ladders, a strategy that entails holding bonds with staggered maturities to the end of their term.
In this case, Trumbower suggests an allocation of bonds with maturities between one and four years with rates in the 4% to 5% range, which she calls “bulletproof in terms of credit risk.”
However, “we are not trying to live on the interest component,” Trumbower said. “If rates go down, the rest of my portfolio can be invested in equities and assume risk.”
A well-diversified portfolio is key
When it comes to stocks, “we stay diversified across asset classes,” she said. “We don’t try to adjust the portfolio in terms of industry concentration.”
Although “small caps are starting to show signs of life” and “tend to do better in lower rate environments,” Trumbower said, “we are not loading up there.”
Maintaining a well-diversified portfolio takes discipline, she added. “You don’t know when the tides are going to turn and what’s going to outperform, you just want to be there when that happens — if you go chasing after the highfliers, it’s a losing battle.”
Disclosure: CNBC receives no compensation from placing financial advisory firms on our Financial Advisor 100 list. Additionally, a firm or an advisor’s appearance on our ranking does not constitute an individual endorsement by CNBC of any firm or advisor.