How to invest in a falling-rate environment
By Laura Bruce • Bankrate.com

The Fed rate cut isn't a signal to completely rejigger your portfolio, but it can be an opportunity to consider investments that generally perform better as interest rates drop.

While lower rates often mean lower borrowing costs for businesses, a continually declining rate environment may mean that the economy is so soft that businesses aren't doing well, unemployment is rising and consumers are cutting back on purchases.

A portfolio that does well in those times may look bit different from one that does well when the economy is performing better. A few changes may be all your portfolio needs to keep it in the green.

We asked two portfolio managers for some ideas that do-it-yourselfers can consider when reviewing their portfolios.

Where to invest now

• Bryant Evans, Champaign, Ill.: "REITs have come down; even the ones that are taking advantage of problems in the housing market ..." Read more ... • Jeff Layman, Springfield, Mo.: "We feel that the starting point for stocks is pretty attractive ..." Read more ...

Bryant Evans: In his own words

Bryant Evans is a portfolio manager with Cozad Asset Management in Champaign, Ill. He specializes in high-yield stock portfolios.

There are two very important things to keep in mind. You know rates have fallen recently, you don't know for sure they will continue to fall. You need to consider what you think rates will do going forward because that's what really matters when it comes to investments.

The other thing is: What does the yield curve look like? If we go with the assumption rates will continue to fall -- and that's not a bad assumption when the economy looks like it's weakening a little bit -- there are certain kinds of investments that do very well, especially short- to midterm Treasury bonds.

As rates go down prices go up and bonds tend to do quite well in a falling-rate environment. But this leads to that question about what will happen going forward. If you get in now and rates continue to go down, you're in good shape. But let's say we're at a historically low rate and they start rising again. Well, those same investments -- short- to midterm Treasuries -- are not a good place to be.

Let's remember that good investors think well beyond the current interest-rate cycle. If you have a good diversified bond portfolio or a laddered strategy, you'll be fine. Diversification and a long-term outlook will mitigate the short-term effect of market and rate fluctuations.

How to diversify in bonds
You can diversify into different kinds of bond funds. Diversified bond funds are often called "total return funds." I like them for someone who doesn't have a lot of money to invest and wants diversification. If you can diversify by investing in two different kinds of bond funds, then you might avoid the total return fund and build a portfolio of bond funds. Think long-term and mix and match. You might have a floating-rate bond fund as well as an inflation-protected fund with Treasury Inflation-Protected Securities, or TIPS. Just in case we're at a historic low and rates are going to start coming back up, those tend to do OK as rates rise. Then mix in some Treasuries and some high-yields and some municipal bonds.