Many Americans admit to being unaware of how rising interest rates will impact their investments, and they still don’t know what course of action to take.
There is no blanket recommendation for how to proceed, as much of your course of action will depend on your portfolio and risk tolerance. But if you’re in the dark about what to do with your investments when interest rates rise, here are four strategies to consider:
Do nothing at all. Many financial analysts agree that as long as you're not planning to sell all your bonds or bond funds immediately, there isn’t much to worry about. When interest rates rise, the value of bonds and bond mutual funds go down temporarily, but you earn more interest on reinvested cash. MoneyZen Wealth Management founder Manisha Thakor says there is opportunity when interest rates rise, because by sticking with CDs and short-term fixed income you can reinvest at higher levels when those instruments mature.
Shorten the duration of your portfolio. If you are sensitive to volatility, consider shortening the duration of your portfolio. Duration is defined as the measure of the sensitivity of an income portfolio to a change in interest rates. Longer-term bonds will continue to be volatile as investors digest incoming economic data, according to Greg McBride, a senior financial analyst and vice president for Bankrate.com.
Maintain your diversification. Not all bonds are created equal, and some fare better than others during periods of rising rates. Consider whether you have a long-range outlook or plan holding bonds until maturity. Many investors own bonds because they can help reduce overall volatility as part of a diversified portfolio by historically moving inversely with stock prices and within a narrow range of lows and highs. Fidelity Viewpoints says when interest rates rise, it can make sense to accept underperforming bonds in your portfolio for their benefits when and if the market changes.
Find a middle ground. Try investing in bonds that are less sensitive to interest rates, such as high-yield bonds or floating-rate bonds. American Association of Individual Investors vice president Charles Rotblut suggests intermediate-term bond funds or building a bond ladder of individual bonds that mature at staggered intervals. When yields do rise, the proceeds from a maturing bond can be reinvested in a higher-yielding bond.