According to Forbes, the US Federal Reserve has increased interest rates for the first time in 10 years. For bond investors, this is a real concern. That’s because if rates increase, prices for bonds will fall. However, the good news is rates increase in many different ways and for many different reasons. Higher rates won’t affect all bonds the same. Robert Shiller, a skilled economist and Nobel laureate, mentioned in the New York Times that rates will universally increase as of December 15. But then again, this brings a lot of uncertainty. What can investors do to adapt to current rate changes?
Opt for a broad range of funds
Changing markets may bring a lot of new opportunities to investors. However, for them to benefit from these opportunities, they have to be willing to consider diverse types of bond funds. Those on a fixed-income portfolio are at liberty to invest in government and corporate bonds; intermediate-term and short-term bonds, low-quality and high-quality bonds, and ultimately, foreign and domestic bonds. This way they have a diversified range of funds to take into consideration in case interest rates increase. Rates will increase gradually according to the FED. This could come in favor of those investing in high-yielding bonds given that their additional yield might offset a decline in prices per bond.
Dealing with risks
If you’re an investor seeking to protect his portfolio against increasing rates, then you should understand that there’s risk involved when it comes in investing money in today’s economy. If you’re decided to select funds that are based on performance only, you may end up holding a riskier investment portfolio than you had initially anticipated. Long term bonds used to be a great investment idea; however for an investor to make a profit with long term bonds, the interest rates had to remain low. Now that they’re growing, these funds are prone to increasing rates. Rather than focus on long-term bonds, why not center your attention on risk and return? Aim to invest in funds that are strong-performing. Furthermore, keep your portfolio diversified and try not to focus on a single investment area.
Accept that the market in changing and adapt
Increasing interest rates might cause a lot of trouble for investors with static allocations to long-term bonds and government bonds. That’s because they’re more sensitive to changing rates. Investors shouldn’t sit and watch as the market is changing. Do something about your portfolio, invest in a financial software program or at least, adopt a strategy that can convince you to change your portfolio and adapt it to current market trends. The safest investment deals used to be high-grade and short-term bonds. However, since the market went through a mild recovery in 2009, smart investors were compelled to move into high-yield, more strategic and global bond funds in order to save their portfolio and see returns.
Monitor your investment portfolio
There’s no sure way of knowing how interest rates increase and to what degree. But why take unnecessary risks? Investors should keep an eye on changing trends. They should monitor their funds on a regular basis and decide whether or not it’s they’re still worth keeping in the long term. Reassess your decisions and adopt a realistic thinking strategy. The more you analyze your investment the better chances you have to come up with smart solutions, and really see what investment deal has potential to succeed, and what deal doesn’t. Review your funds on a monthly basis and you’ll be able to fix what doesn’t seem to be right. This will make room to new ideas, and you’ll be able to invest in funds that have a real chance of making it in the current market environment.
Recent research done by a professor at the Harvard Business School has suggested that long-term portfolios are a complex issue. Even though there are viable reasons to invest long-term, due to unexpected market changes, these investments may not render returns. Investors must consider their own personal spending needs to, but not economic factors. Considering that increasing interest rates are starting to affect assets in many different ways, the safest solution is to keep your portfolio diversified. It’s always good to have more than one option in the business world, especially when you can’t be sure of anything.