Will the Fed rate decision affect your portfolio?

How will bonds react and where should you look?

The bond section of your portfolio is most affected by rising or falling interest rates. Rate rises hit long-duration bonds and it is harder to find income from safer bonds when rates are low.

"We read the latest Fed statement as particularly bond-friendly - especially for the risky segment," says Christian Gattiker, chief strategist and head of research at Julius Baer. "As a consequence, we upgraded the US high-yield segment, where borrowers will benefit from this borrowed time by the Fed as they do best in a low-growth, low-inflation environment and provide a decent risk premium."

Thomas Becket, chief investment officer at PSigma is negative on Treasury and gilt yields and says US high yield looks particularly attractive. He says: "The lack of an interest-rate cut continues to make credit instruments very active; excess yields over government bonds are attractive, borrowing costs are low and defaults still rare."

But he says it will not pay to get too complacent about low interest rates. Below target US inflation was behind the Fed's decision but quantitative easing (QE) programmes across the world are pumping liquidity into the system. He says that over the long term inflation could surprise on the upside and it could pay to take out inflation protection.

"Holding cheap inflation break-evens and commodities might well have provided for sleepless nights in the last few years, but could well be the assets to help you sleep in the rest of the decade," he says.

Making decisions about fixed income allocation is particularly tricky now. Concerns about China's economic slowdown, lower oil prices and the distorting impact of QE on markets have all made the bond market unpredictable. Chris Iggo, chief investment officer for fixed income at AXA Investment Managers, says: "In terms of the outlook for the bond market, the Fed and China both make it difficult to have strong views." But he adds: "I don't have much confidence in taking long-term interest rate risk."

Emerging markets equities

Emerging markets equities are also highly sensitive to rate hikes. In 2013 an emerging markets 'taper tantrum' ensued when the Fed last seriously considered raising rates and this month fears of another crash fed into the central bank's decision.

Volatility will stay high either way but Russ Koesterich, BlackRock's global chief investment strategist, says the decision has opened up some value opportunities for contrarian investors. China has experienced another sell-off over the last week, while other markets have fared better.

"Markets posted solid gains in India, South Korea, Turkey and even Brazil," he says. "It is too early to call a bottom in emerging markets, and there could be more volatility ahead, although valuations are now attractive. At the recent lows, emerging markets equities were trading at less than 1.3 times book value and the current price-to-book ratio is the lowest since coming out of the financial crisis. This represents a 35 per cent discount to developed markets, the largest in 12 years. For investors with little or no exposure to this asset class, this may be a reasonable time to start slowly re-establishing positions."

Mark Mobius, manager of Templeton Emerging Markets Investment Trust, says: "In our view, a series of rapid or large interest rate increases could further destabilise the markets over the longer term, but as stated we don't see that as a likely course.

"We would also emphasise that while some recent market shocks have been unsettling to many investors, volatility goes both ways - we could see equally sharp rebounds in equity markets take hold and asset flows shift as more positive events unfold."

How should you position?

With rates remaining low, it will continue to be difficult to glean income from your investments. That means that a combination of income and growth will be important. Tom Stevenson, investment director at Fidelity Personal Investing, says that assets that can offer investors a combination of income and growth will remain in favour. He says: "Dividend-paying stocks, corporate bonds and real estate all provide investors with the prospect of a yield that will continue to remain elusive for cash savers."

Mr Becket said PSigma was buying property real-estate investment trusts that performed badly this year but are likely to do well in a low rate environment.

Meanwhile, Dave Mazza, head of research at SPDR exchange traded funds, argues that investors should still be preparing for a rate rise in the near future and recommends taking exposure to US equity sectors likely to benefit when that happens. He points to homebuilders and regional banks as industries to consider, arguing: "The financial sector and related sub-industries, banks and regional banks, display the strongest positive relationship to rising interest rates, with regional banks exuding the highest of any sector or industry".