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When it comes to investing, there aren’t many things you can predict with certainty, but here’s one of them. When interest rates rise, bond prices fall. It’s a rule that’s about as ironclad as what goes up must come down.
And now that it seems to be only a matter of time before interest rates rise at least a little bit, bond investors have to wonder how this will affect their holdings. If you’re an investor approaching retirement age you’ve probably heard the advice – and maybe heeded it too – to get out of stocks and into bonds as your working years wind down.
Bonds, always a favorite among investors adopting a more conservative strategy as they approach retirement, have enjoyed an extended heyday in recent years as the Federal Reserve has repeatedly delayed raising interest rates from historic lows. But the Fed’s recent pass on a rate hike could be its last. No one, probably not even Fed Chairwoman Janet Yellen, is sure when interest rates will rise, but everyone agrees they can’t stay at these historic lows forever.
So, what can you do if you’ve built your retirement around secure bonds? Consider the following steps.
- Prepare. First, consider yourself fortunate that you have more than ample warning about an impending rate hike. While the Fed is known to drop hints about its future course, this time around it’s pretty much screaming its plans, leaving only the timing in question. Yes it’s possible that it will once again decline to raise rates, but an eventual rise is inevitable. Be prepared.
- Don’t panic. Having said that, keep in mind that when rates do go up, they are most likely to rise slowly and by modest amounts. And by most accounts, this long-anticipated rise has most likely been factored into bond prices. In other words, a sudden wild price swing is unlikely. Just this week, in fact, Yellen seemed to allude to a further delay in raising rates amid persistent concerns about the strength of the economy. Whenever the Fed does raise rates, it will be the start of what will most likely be a slow, gradual ascent.
- Seek quality. Portfolio maintenance is important, and that goes for bonds as well as stocks. While bonds typically fall under the umbrella of secure investing tools, there is a wide array of bonds to chose from, all with different yields and different risk profiles. Corporate bonds with high yields are generally a good way to balance security with strong yields. But be careful about corporate bonds from emerging markets, which tend to be more volatile.
- Reconsider your bond exposure. Without a doubt, bonds are a valuable investing tool, especially for retirement planning. But it’s worth asking how much you should be weighted in bonds. At a time when many people will spend 30 years or more in retirement, it’s clear that not all retirements look the same. A 55-year-old, even if he is no longer working, may have a greater appetite for risk – and a greater need to grow his portfolio – than an octogenarian.
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