Many investors are concerned about the recent, inevitable rise in interest rates, which has caused some holdings to experience a short term, sharp drop in value.
A number of experts have recently spoken on this matter. Here are some of their thoughts:
Tom Brakke, an investment advisor who specializes in the analysis of investment decision making, says your reaction depends on your portfolio and your risk tolerance. If you’ve been “out on the yield curve”, invested in risky high yield instruments, consider taking your medicine and reduce your risk profile.
Sheryl Garrett, founder of the Garrett Planning Network, suggests we take advantage of rising rates by laddering CDs, and considering individual bonds and fixed annuities. With rising interest rates, work to minimize your personal debt, and watch the debt of the companies you choose to invest in.
Christian Magoon, founder and CEO of YieldShares, tells us to be aware of the duration of our portfolio, which is the sensitivity of the portfolio to a change in interest rates. Stick to, or build your bond portfolios with a low duration.
George Papadopoulos, a wealth manager from Novi, Michigan says to position your bond portfolio towards short-term investment bonds. He suggests we be patient, and ignore the human tendency to “chase yield”. If we focus on factors we can control, we will reduce the probability of losses in an increasing rate environment.
Eleanor Blayney, consumer advocate of the Certified Financial Planner Board of Standards, has a slightly different take on the subject. She suggests that we focus on the real reason for the rising interest rates in the first place. She reminds us that Mr. Bernanke’s announcement that the Fed will ease off monetary easing was based on the observation that the U.S. economy is on the mend, and now needs less artificial stimulus from the Fed.
If you have any questions about these experts’ opinions, or would like an independent review of your fixed income portfolio, please contact me for a obligation-free consultation.