The Federal Reserve isclose to raising interest rates againpossibly even this year.
That means your bonds will lose value, so whats a balanced investment portfolio to do?
Here are three things it’s possible for you to do to combat interest rates effect on your investments.
When you invest in a bond, there are two monetary values you better think about.
First, a bond pays a fixed amount of interest every quarter, called thecoupon rate.
This value never changes until the bond is repaid (called maturing).
Lets say IBM issued a bond paying 5% and maturing in 2035.
Its only returning 5%, while other new bonds are returning 10%.
When interest rates drop, bond values rise.
When that happens, you’re able to expect the value of your bond funds to drop.
However, as rates rise, so does the return on anynewinvestments in bonds or bond funds.
But even though the price of bond funds may change, those monthly interest payments will stay the same.
Some bonds have a five year term, others run as long as 50 years.
For example, a 20-year bond issued in 2000 would only five years left to maturity in 2015.
Just like all bonds are not the same, not all bond funds are the same.
Its the classic risk/return trade-off.
Vanguard offers anifty slider toolto visualize this.
When interest rates go up, you will notice the value of your bond funds go down.
Rebalancing before the interest rate goes up helps you get around that.
You obviously want to minimize the hit that 20% will take with rising interest rates.
Lets say 10%.
Doing this lets you sell those bond funds at their higher values before they begin falling.
After some time, your portfolio will end up again with 20% in bond funds.
There is no one strategy fits all.
Title image remixed fromvenimo(Shutterstock).
