How should one approach investing in cash equivalents if interest rates are expected to rise?

Investing in cash equivalents when interest rates are expected to rise generally encourages a strategy focused on shorter durations. Short-term instruments are less sensitive to interest rate changes, allowing an investor to reinvest or adjust their portfolio as rates increase without facing significant losses from price declines associated with long-term bonds or cash equivalents.

When interest rates rise, the value of existing fixed-income securities tends to decrease, particularly long-term instruments, because they lock in lower rates for an extended period. By investing as short as possible, an investor retains flexibility and can benefit from higher rates in the near term rather than being locked into lower yields from longer-term securities.

Holding current investments may not be advantageous, as it could mean missing out on the opportunity to invest at higher rates or saving on the potential losses that come with falling prices of long-term securities. While diversifying into equities can be a viable strategy, the scenario specifically addresses cash equivalents and their interest rate sensitivity, making short-term investments the most prudent approach under these circumstances.