This is not going to be a piece on predicting interest rates. We have plenty of writings demonstrating how poorly experts, investors, economists, etc. can be with prophesies. This is more “big picture” thinking. This is simple but so very important.
Through all the years that interest rates have dwelt at or near historic lows, there exists a feeling that they “have” to rise. After all, they couldn’t possible go lower? Slowly, it seems economic conditions may finally be providing tangible data to substantiate at least a change in rate direction. The Fed is providing a push to short term interest rates through period hikes. Data releases are confirming a healthier and growing economy.
This is an appeal to stay ahead of game with the fixed income assets allocated to your core portfolio. That is, the assets allocated to protecting your wealth, not necessarily those designed to grow. Here is the one and only intended takeaway:
One of the most effective means to protecting your wealth in a
rising interest rate environment is by investing in individual bonds.
Individual bonds provide a different protection than most any other asset class. Many investment products containing fixed income bonds ARE NOT included in this category and DO NOT provide the same protection, most simplified by fact that they do not have a stated maturity. Stated maturities allow investors the option to hold bonds through price volatility and thus negate the effects of price changes. Furthermore, if market prices (or statement prices) change, those changes have zero effect on the cash flow and income stream that the individual bond provides.
Make sure your portfolios are providing the protection you think they are providing. Have this discussion with your advisor. Ask your advisor for a copy of True Fixed Income – A Favored Asset Class for a Rising Interest Rate Environment.
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.