The prospect of rising interest rates, though not anticipated for the near future, has many bond holders wringing their hands. Their fears were stoked earlier this year by gurus like
But a fixed income strategist at Schwab offered strategies planners can use to avoid “bondageddon” and stay in the bond market, while protecting their clients’ assets.
“In our view, investors should manage their bond portfolios to mitigate the risk of rising rates, rather than abandoning the asset class altogether,”
First off, Jones doesn’t anticipate any rate jumps until 2013 or 2014. However, she cautions, “longer-term bond yields have historically moved higher six to nine months before the Fed raises short-term rates for the first time in a cycle.”
It’s complicated to understand how to measure a bond’s “duration,” the measurement of its sensitivity to changes in interest rates. To simplify the process, Jones offers a rule of thumb for measuring the percentage change in a bond’s price given a 1% rise of fall in interest rates. For example, if you own a10-year bond, with a five-year duration, and interest rates decline 1%, you should expect it to gain 5% of its value. If rates move the same amount in the other direction, the bond’s value should decline 5%.
To prepare for a possible bump in interest rates, she offers the following strategies.
“We believe it's prudent to make sure your portfolio isn't over-allocated to bonds—especially long-term bonds,” Jones writes. “However, we believe it would be ill-advised to ignore the potential benefits of diversification and income generation that bonds can provide in an overall portfolio."
|Copyright:||(c) 2012 Financial Planning. All rights Reserved.|
|Source:||Source Media, Inc.|