Investors have grown accustomed in recent years to historically low interest rates. Though there have been periods of upward movement, since 1981 the general long‐term direction of rates has been downward. Starting in December 2008, the Federal Reserve Board lowered its target rate to between 0.25% and zero to try to ensure that credit would be available to promote economic recovery. But what happens when the trend reverses? The decline in bond yields produced a bull market in bonds over the last decade, because bond prices move in the opposite direction from yields. That means that as rates begin to rise again, you should expect bond prices to begin to reverse direction.
Here are some factors to consider in anticipation of a future with rising interest rates. Keep an eye on the maturity dates of your bonds. The prices of bonds with longer maturities will feel the most impact from rising interest rates, but individual bonds can be held to maturity to avoid loss of principal. Also, laddering a bond portfolio—staggering maturity dates so you can reinvest the proceeds as each bond matures—can help you adjust over time to rising rates. A bond mutual fund’s duration can suggest the fund’s sensitivity to rate changes; the longer the duration, the more vulnerable it may be. Review your bond portfolio to see whether a potential loss of value would offset the benefits of the higher income that longer‐dated maturities generally offer. Bond prices don’t necessarily rise and fall equally; various bond types or maturities may react more strongly to interest rate changes or represent a better value than other categories. For example, during the fall 2008 financial crisis, the difference between corporate and U.S. Treasury bond yields rose because investors preferred the relative safety of U.S.
debt to that of individual companies. If you own preferred stock shares, remember that because the dividend they pay is fixed, prices of preferred shares typically behave much like those of bonds and also could be affected by rate changes. Rising rates also could bring better returns on savings accounts, certificates of deposit, and money market instruments. (However, remember to include the impact of inflation when considering the return on such cash alternatives.)
The Federal Reserve has said any increase in its target rate will depend on the state of the economy, but other interest rates have already begun to rise. Remember that everyone’s investment objectives are different and thus not every investment strategy applies. Proper financial planning is always the best option in helping you navigate through the ever-changing economic landscape that surrounds us daily. The days of the buy-and-hold strategies do not necessarily apply within everybody’s investment strategy so it’s best to check your risk tolerance and time horizon often as it pertains to your portfolio strategy and make the necessary changes to best weather the coming storms.
Another thing to consider is how often market cycle. Just because the bond market has been up for some time now, just as gravity pulls weight down naturally, so was it expected for the interest rates to rise. The best way to mitigate your risk in your portfolio is proper diversification. Make sure you have a good balance within your portfolio of the proper asset classes such as bonds and stocks. Weigh in the need for appropriate alternative investments and understand the necessary risks associated to your portfolio.
One final comment is placing too much attention to the financial news. We are bombarded with information online, television etc. we can get information on any topic faster nowadays than ever before. Remember that new stations report the news so do not get caught up on an emotional rush to make a decision based on short-term trends but rather seek guidance from your financial advisor to see how current conditions can affect your overall plan. Most people lose money in their portfolios as a result of investor performance rather than investment performance. Basing investment decisions from emotional reactions generally never lead to prosperous growth once portfolio but rather having a solid investment strategy can make all the difference. Now might be a good time to review your portfolio to see whether it’s positioned to handle the possibility of higher interest rates in the future.
Make that call today!
Partner & Director of Insurance & Estate Planning
Wealth Management Advisor
Strategic Wealth Advisors
Terrace Gardens Office Park
600 Sunland Park, Building One, Ste 100
El Paso, Texas 79912
(915) 532-8885 Office
(915) 842-9532 fax
(915) 588-7897 cell
Views and opinions expressed are those of Bobby Blanco and are subject to change based on market and other conditions. It is general in nature, is provided for informational purposes only, and should not be construed as specific investment advice. Consult a financial advisor regarding your specific situation.
Diversification does not assure an investor a profit nor does it protect against market loss.
Past performance is no guarantee of future results.
Securities offered through Investors Capital Corporation, Member FINRA, SIPC
Advisory Services offered through Investors Capital Advisory
6 Kimball Ln, Lynnfield MA 01940