What higher rates mean for investors

September 14 23:18 2015

Investors around the world are closely watching the U.S. Federal Reserve this week in advance of a highly anticipated policy meeting. But regardless of whether the Fed starts raising key rates in September or at a later date, one thing is clear: Investors in both the stock and bond markets are preparing for an environment of increased rates.AFP 536218556 A FIN USA DC

The biggest area to focus on, Johnson said, is bond investments. There is an inverse relationship between bond yields and underlying bond values, because new bonds reflecting these higher rates are in demand, and the older bonds with lower payouts become less attractive to investors. To protect your bond portfolio from losses, Johnson advises looking at shorter duration bonds — for instance, a focus on bonds that mature in one to three years instead of 10 to 20 years. Yields aren’t as high in shorter-term bonds, of course, but the risk of losing value is significantly lower because they mature faster.

Of course, if you’re nowhere near retirement age — say, if you’re a younger worker contributing to your retirement account every month — then there may not be any reason to have any bond exposure at all right now, given the risk of losses in a rising rate environment. Those with patience and time on their side should consider putting 100% of their portfolio in stocks, said Denny Baish, a senior investment analyst at Fort Pitt Capital Group in Pittsburgh. Even though there is also the risk of short-term declines in stocks, Baish said, “Younger investors will have plenty of time to ride out the ups and downs of any market.”

“Remember, even if the market drops, you’ll be contributing (to a 401(k) or IRA) and buying stocks at a cheaper price,” he said. This kind of “averaging in” by investors with time on their side is a proven method to achieve long-term returns in stocks regardless of any immediate risk from market uncertainty. And even if you don’t feel comfortable with the higher risk profile of an all-stock portfolio, Baish added, bond investors still should consider a “tilt” toward stocks in their asset allocation right now.

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