When the Fed (Federal Reserve) raises interest rates, it often means that the economy is doing well. While this is an overall positive thing, it means interest rates on other things, such as your credit cards, may also increase. This can also affect your bond portfolio, meaning that the price of your bonds may fall. So what does this mean for your bonds? A few factors should be considered before you make any moves with your bond portfolio.
Not all bonds are created equal
A change in interest rates may not affect all bonds in the same way. Typically, if a bond has a longer maturity, it will be more affected than ones with a shorter maturity. A bond that matures in 20 years may lose more value than one with a lower rate of maturity. It is also important to look at the bond’s coupon rate, which is the yield the bond paid on its issue date. A lower coupon rate means the bond will be affected more by rising and falling interest rates. Other factors can affect if the value will change as well, such as whether it has a variable rate or a fixed rate. A bond with a variable rate likely will not lose as much in value as a fixed rate.
Hold on to your bonds
If you hold onto your bond until it matures, you’ll receive the face value plus the interest rates you were promised upon purchase. This means rising interest rates will not affect what you receive once your bond has matured. However, if you have to sell your bond before it matures, that’s when you’ll experience a loss if interest rates have risen. If interest rates have gone down since you invested, the value of your bond goes up. When investing in bonds, the way to make money is to hold onto them as long as possible. They should not be used if you might need to cash them in in an emergency situation, because you may need it in a time where you’d be losing money. You run the risk of losing money if you need to pull it out in a time of need.
Other investment options
Aside from bonds, there are other investment options that can be more reliable if you’re looking for an investment that isn’t as affected by external factors. Investing in things like fix’n’flip real estate properties may be a more stable investment than something like the stock market, which can be extremely risky and requires a lot of knowledge to actually make money. While fed interest rates affect mortgage rates as well, The benefit to real estate is that it holds its value well, but stocks and bonds are liquid assets that can be easily turned into cash. Make your investments with an understanding of what you might need to cash in someday and what you’re going to be able hold onto indefinitely until a profit is gained.