What would rising interest rates mean to you?
Provided by RBC Wealth Management
and Dave Dupont
Following the financial crisis of 2008, many investors rushed to the investment sidelines to avoid risk of any kind. While understandable given the market environment, those that chose to remain invested in the markets have been well rewarded as both bonds and stocks have posted strong performance numbers. Bonds, given their perceived level of safety and backstopped by the Federal Reserve’s long-term commitment to low rates, benefitted the most, with investors pouring billions into bonds and bond-based mutual funds.
Unfortunately, however, investors may have over-concentrated their portfolios with bonds and bond funds. As a result, they may not be in quite the safe position they had envisioned.
As you may already know, especially if you own bonds, interest rates and bond prices typically move in opposite directions. Consequently, if interest rates were to rise, the value of your bonds would fall, because no one would be willing to pay you the full face amount of your bonds when newer ones are being issued at higher rates.
You have likely seen the value of your bond portfolio change recently as market conditions have become more volatile due to the growing debate over the next course of federal action. The Federal Reserve is actively working to keep short-term rates low. But the Fed has much less control over long-term rates — and these rates have far more room to move up than down. With the U.S. economy showing signs of recovery and the Fed beginning to discuss a “tapering,” or reduction in their monthly stimulus efforts, expectations are high that rates could begin to rise in coming months.
What should you do?
• Review your portfolio. If you have taken on too much credit or interest rate risk, you may want to consider making some adjustments, as these bonds are likely to be much more subject to volatile price swings from changes in interest rates.
• Build a bond ladder, or restructure an existing ladder. A bond ladder may prove beneficial to you in all interest-rate environments.
It can be unsettling to look at your investment statement and discover that the value of your bonds has fallen. But, as we’ve seen, you do have methods of coping with rising rates and falling bond prices — we encourage you to be proactive, consider your options carefully and make those moves that can help you continue making progress toward your financial goals.
This article is provided by Dave Dupont, a Financial Advisor at RBC Wealth Management. RBC Wealth Management does not endorse this organization or publication.
RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC