An advisor suggests that investors should prepare for lower interest rates by considering it as a haircut.

• On Friday, Jerome Powell, the Federal Reserve chair, indicated that lower interest rates are imminent.
• Since the start of the Covid-19 pandemic, the central bank has not reduced interest rates.
• Advisors suggested that investors not do much to prepare for the shift.
• Lower-risk assets like cash and short-term bonds are expected to pay less of a return.

On Friday, Jerome Powell, the Federal Reserve chair, provided the clearest indication yet that the central bank is likely to reduce interest rates, which are currently at their highest level in two decades.

If officials cut rates in September, as experts predict, it would be the first time they have done so in over four years, since they reduced them to near zero at the start of the Covid-19 pandemic.

At the onset of this policy change, investors may be questioning their next course of action.

Financial advisors on CNBC's Advisor Council suggest that those who are already diversified don't need to make significant changes to their portfolios at the moment.

Winnie Sun, co-founder and managing director of Sun Group Wealth Partners in Irvine, California, stated that while the news is welcome for most people, it doesn't necessitate significant changes.

She compared the process to getting a haircut, explaining that they were making minor cuts.

Those with long-term investments, such as those holding most or all of their assets in a target-date fund through their 401(k) plan, may not need to take any action, advisors stated.

Professional asset managers oversee such funds and make the necessary tweaks for you.

According to Lee Baker, a certified financial planner and founder of Claris Financial Advisors in Atlanta, they are working on your behalf in secret.

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That said, there are some adjustments that more-hands-on investors can consider.

Advisors suggested that tweaks to cash and fixed income holdings, as well as the types of stocks in one's portfolio, may be necessary.

Lower rates are 'positive' for stocks

In his keynote address at the Fed's annual retreat in Jackson Hole, Wyoming, Powell stated that "the time has come" for interest-rate policy to adjust.

The proclamation is made as inflation has decreased significantly from its peak during the pandemic in mid-2022, and the labor market has shown signs of weakness. Lowering interest rates would ease some strain on the U.S. economy.

In September, the Fed will likely decide between a 0.25 or 0.50 percentage-point rate cut, according to Stephen Brown, deputy chief North America economist at Capital Economics.

Lower interest rates can boost the stock market, as businesses may feel more confident to expand with lower borrowing costs, according to Marguerita Cheng, a CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

Advisors advised investors not to make drastic changes to their portfolios following Powell's statement due to uncertainty about the number, size, and speed of future rate cuts.

"Things can change," Sun said.

Powell stated that the decision to lower rates is contingent on incoming data, the evolving outlook, and the assessment of risks.

Considerations for cash, bonds and stocks

Investors can anticipate lower returns on their "safer" funds as interest rates decline, advisors stated.

Savings accounts, money market funds, and certificates of deposit are examples of low-risk holdings.

Lower-risk investments have provided investors with high returns due to the favorable interest rates.

Advisors suggest locking in high guaranteed rates on cash now, as returns are expected to fall alongside declining interest rates.

Ted Jenkin, a CFP and the CEO and founder of oXYGen Financial in Atlanta, advised that it may be a suitable time for individuals considering purchasing CDs at the bank to secure the higher rates for the next 12 months.

In a year, you likely won't be able to renew at the same rates, he stated.

Instead of keeping excess cash in low-paying savings accounts, investors can park their funds in higher-yield fixed-income investments such as longer-duration bonds, advised Carolyn McClanahan, a CFP and founder of Life Planning Partners in Jacksonville, Florida.

"We're being proactive in educating clients about the interest-rate risk they're incurring by staying in cash," she stated. "Not enough individuals are considering it."

In six months, when interest rates are lower, they'll be crying, she predicted.

The sensitivity of a bond to interest rate changes is measured by its bond duration, which is expressed in years and takes into account the coupon, time to maturity, and yield paid throughout the bond's term.

Bonds with shorter terms typically offer lower returns but come with less risk.

Sun advised that a duration of five to 10 years is probably suitable for many investors to maintain the same yield as the past two years, while advisors suggested that investors may need to increase their duration and risk to achieve the same yield.

Advisors generally don't recommend tweaking stock-bond allocations, however.

Sun suggested that investors might want to allocate more of their future contributions to various types of stocks.

Utility and home-improvement companies' stocks tend to perform better when interest rates decline, she stated.

Jenkin stated that asset categories such as real estate investment trusts, preferred stock, and small-cap stocks typically perform well in this environment.