Do You Know Your Number?

December, 2013

The Impact of Rising Interest Rates on Your Portfolio.

Regardless of your risk tolerance, age, or investment objectives, the vast majority of investors own individual bonds or bond mutual funds/ETFs in their investment portfolios. Recently, there has been a crescendo of opinions from respected bond managers announcing the “end of the 30 year bull market for bonds” and concerns about the “coming bursting of the bond bubble”. So why are bond managers making these predictions?

The answer is simple. Bond prices and interest rates move in opposite directions. Interest rates have been steadily declining for 30-years and are now at or near record lows, which has pushed the prices of existing bonds to record highs. Interest rates are not just at historic lows, but are also very close to zero, with nowhere to go but sideways or up.

Changes in interest rates affect bonds differently. For example, the price of long term, fixed rate bonds usually fare the worst in a rising interest rate environment. On the other hand, bonds that can reset their interest rate in a relatively short timeframe (i.e., variable rate bonds) can actually protect you from an increasing interest rate environment. So, it is really important to understand which bonds are positively and negatively impacted in this kind of environment, and to make sure that the portfolio is appropriately positioned for the current and expected inflation/ interest rate environment.

How exposed is your portfolio to rising interest rates?  What is Your Number?

This information is provided for informational purposes only.  The information contained herein is from sources believed to be reliable, but its accuracy or completeness is not guaranteed.  This information should not be construed as an offer to sell or a solicitation of an offer to buy any security by PlanStrong Investment Management.  Any opinions expressed herein are subject to change without notice.  Past performance is not a guarantee of future returns.

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