|If inflation does remain low for the near term, the Federal Reserve is unlikely to raise short-term interest rates significantly. Assuming short-term rates stay low for a while, you may want to consider longer-term bonds, which usually offer higher interest rates, if suitable for your goals, risk tolerance and time horizon.
But if interest rates rise, the value of existing bonds tends to fall and if sold prior to maturity, the investor can lose principal value. To help protect yourself against this interest-rate risk, consider building a “ladder” containing bonds of varying maturities.
When rates rise, you may be able to reinvest the proceeds of your short-term bonds in new ones that carry the higher rates. And if rates fall, you can still collect larger interest payments from your longer-term bonds. In addition to interest rates, credit quality and risk are also important considerations when selecting bonds.
By keeping inflation and interest rates in mind, you can help build an “all-season” bond portfolio.
Also, if you own bonds, pay close attention to what happens over the next several months, because with interest rates so low, it’s likely there’s only one way for them to go: up.
When will rates rise? No one can say for sure. But you can prepare your bond portfolio now.
One strategy is to create a “ladder” of bonds of varying maturities. A bond ladder is designed to provide advantages in all interest-rate environments. When market rates are low, you’ll benefit from the presumably higher rates provided by your long-term bonds. And when market rates rise, you’ll be able to use the proceeds from your maturing short-term bonds to purchase the new, higher yielding bonds. Keep in mind bonds can be called prior to maturity so you may be reinvesting your principal in a lower interest rate environment.
You can’t predict the future. But by anticipating an interest rate hike, and adjusting your investment plans accordingly, you can help avoid unpleasant surprises.
Contact Wendell at Edward Jones www.edwardjones.com.