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Rule 101 of investing: When interest rates rise, bond funds will fall. Question is, how do you prepare your bond portfolio for rising interest rates?
If you require any proof of what will happen when interest rates rise, you only need look at the bond sell-off this spring to see how bond mutual funds and exchange-traded funds might perform if rates mount a sustained rise.
So should you dump bonds ahead of time and plough more money into equities? The answer is no. Fixed income still has a place in your portfolio, it provides stability against the volatility of equities markets. But you shouldn’t bury your head in the sand either.
There are a number of things you can do to protect your portfolio in a rising rate environment. Michael A. Pollock has an excellent article in today’s Wall St Journal, about using shorter term bonds along with diversification to protect against rising interest rates.
But that’s not all, bond ladders can also be used to offset the risk of rising rates. This article from Learn Bonds, shows you how to structure a bond ladder using bond funds as opposed to individual bonds. A fund ladder can be structured with comparable levels of interest rate risk, offering the potential for more income and greater liquidity than a traditional bond ladder.
So it’s time to stop worrying about what rising rates will do to your portfolio and start acting. There’s still plenty of time to get your portfolio in shape before the inevitable rise in interest rates starts to hit. Don’t say you haven’t been warned.
More Top Bond Stories
Bloomberg: – No Detroit fallout across U.S. as GO’s stage rally: Muni credit. – Detroit’s record bankruptcy filing isn’t derailing the $3.7 trillion U.S. municipal-bond market. Just ask Tom Hamilton, finance director of Norwalk, Connecticut.
Bloomberg: – Berkshire avoids rout as Buffett sidesteps bonds. – Warren Buffett’s preference for buying stocks and whole companies rather than bonds is helping Berkshire Hathaway Inc. (BRK/A) weather a spike in interest rates better than other insurers.
Learn Bonds: – D.R. Horton issues new 5.75% senior bonds. – Investing in housing or securities related to housing seems to be all the rage. If you want to add exposure to housing but prefer to avoid the buy-to-rent craze sweeping the nation and want to stay away from housing-related common stocks, you might consider moving up the capital structure. Both the preferred stocks of several equity REITs and the senior unsecured debt of a few homebuilders are offering enticing risk-rewards.
WSJ: – Bond manager wanted out before the bear arrives. – For successful financial professionals, the toughest decision sometimes is when to quit. The bond-market outlook made the choice easier for Margaret “Didi” Weinblatt, who retired in 2012 after a dozen years as a bond-fund manager at San Antonio-based USAA Investments.
Liberty Street Economics: – The recent bond market selloff in historical perspective. – A look at how the recent bond market selloff compares to the historical selloffs of 1994 and 2003.
Barron’s: – In muniland, Detroit’s more the exception than the rule. – BlackRock’s investment strategists are again this morning hammering away at fears over trouble for the municipal bond market. They’ve got a few charts they hope will put investors at ease.
WSJ: – Bond ‘coupons’ explained. – Simon Constable takes a look at bond coupons, what are they and how do they affect the value if your bonds.
Bloomberg: – Alabama selling first debt since county’s bankruptcy. – Alabama plans to sell $173 million of general-obligation bonds in its first issue since Jefferson County filed for bankruptcy in 2011.
TulsaWorld: – Bond funds vs. individual bonds. – Many investors buy individual bonds rather than putting their money into bond funds. For now, those investors are crowing about the steady income they’re earning. They’ll continue to get those payouts, they say, regardless of what foolishness erupts in the bond market. And as long as they hold their bonds to maturity, they’ll get their entire principal back — except in the unlikely event that a bond issuer defaults.
Ploutos: – High Yield / Long Treasuries. – Using high yield bonds and Treasuries to build a fixed income momentum strategy.
Telegraph: – How to save your nest egg from the bond crisis. – With bond funds falling investors are jumping ship – but where should they put their money? The experts share their fund tips.
ETF Trends: – High-yield bond ETFs not confirming new S&P 500 high. – The major U.S. stock indices have broken out to fresh highs but high-yield corporate bond ETFs have yet to join the party as interest rates rise.
The Daily Journal: – Navigating municipal bonds after Detroit. – When Detroit became the biggest city in U.S. history to file for bankruptcy last month, it turned public attention to the municipal-bond market, where cities and states go to borrow money. Was this sleepy, often-overlooked area of the financial world actually dangerous?
MarketWatch: – Don’t dig yourself into a muni-bond pothole. – It’s no shock that Detroit filed for bankruptcy. Decades of mismanagement — employees received so much in pay and benefits that there wasn’t enough revenue left to pay for the public services that they were employed to provide — made it more a matter of when than if the city would go bust.
IndexUniverse: – Schwab plans 3 ultra-short-bond ETFs. – Charles Schwab is proposing three short-term, target-duration bond funds, the latest sign that fund sponsors are looking to provide investors with more choices to effectively manage an environment of rising interest rates.
there are two muni markets right now….the national market and the California market 5 years and shorter which is completely on its own
— Michael Pietronico (@MillerTabak) August 5, 2013
Gundlach buying 25yr avg life leveraged inv floaters for $DBL – he's buying the longest duration bonds in agy mbs land
— David Schawel (@DavidSchawel) August 5, 2013