As we meet with clients, a common theme is investor frustration with the low yields that are available for high quality fixed income investments, such as CDs or short term government bonds.
We often say that we don’t have a crystal ball and we cannot predict the future. However, the implication for the eventual rise in interest rates and their impact on many investors is best stated as: “Not if, but when.”
Interest rates are at historically low levels, due to the economic crisis that we have endured since 2008. Eventually interest rates will rise. No one knows specifically when this rise will begin, how quickly it will happen or to what extent. But we know that eventually interest rates will rise from their current levels.
What will happen when rates rise? Who will be affected and will that affect be good or bad? Many people we meet with who are not currently clients, or clients who still hold some of their investments elsewhere, hold some of their fixed income investments in bond funds. When interest rates rise, bond values will fall. The longer the maturity of the bond, the larger the loss will be. This is an economic reality.
Investors in bond funds, who think they own a “safe investment,” are going to be facing losses, some of which will be very significant, when interest rates rise. We recommend that investors hold high quality individual fixed income investments, not bond funds. By holding these investments to maturity, our clients will avoid the losses that investors in bond funds may incur, when interest rates rise.
So investors may want to “reach” for the higher yield that tempt them by owning a bond fund (or lower quality or longer term bonds), but they will be better off in the long run to stick to short term, high quality individual bonds or CDs.
We can work with you to structure a fixed income portfolio that will maximize the interest rate return that is available today…and properly structure your fixed income portfolio for the eventual rise in interest rates. This will help you avoid what we predict will be one of the major financial stories of the next 5 years…the massive losses that will be incurred by investors in bond funds when interest rates rise. Don’t make that mistake!