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Rising Interest Rates

[/fusion_text][fusion_text]Sometimes I feel like the boy who cried wolf. For years I have been talking about the possibility that interest rates rise from their historic lows. Every time it looks like we are seeing interest rates tick up, they reverse course (often hitting new all-time lows). We have entered another period where there’s hope that interest rates are making a move upwards.

You’ll note I said I “hope” because higher interest rates would be a welcome change for long-term investors. It’s about time savers got paid for their safe investments again. Our strategy in bonds focuses on bonds maturing in seven years or less, usually with an average maturity of three years. This is important because rising interest rates can cause short-term losses in bonds. If interest rates go up the same across all maturities, long-term bonds go down the most.

The other thing working in your favor during rising interest rates is you start earning more interest as you reinvest your maturing bonds at higher interest rates (bond funds do all this behind the scenes). You can make up those short-term losses in no-time and start banking extra money because you’re earning higher interest rates going forward.

I like to tell my clients that a bad year for their bonds could see losses of 3%-5%, and even that would have to be due to rapidly rising interest rates or a financial crisis. To put that in perspective, you can lose that much in the stock market in a day.[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.