Making Fixed Income Work for You in a Rising Interest Rate Environment
Beginning in May and continuing in June, bond prices have been under pressure as interest rates have begun to rise. As a result, many investors in fixed income securities are now underwater for the year after enjoying a multi-year period of extraordinary gains. As interest rates continue to migrate higher, albeit in a very erratic and unpredictable fashion, it is likely that bonds will continue to post anemic returns over the next year or two, if not longer.
Sigma does not recommend that one should sell all of their fixed income holdings in an attempt to side-step the possible continuation of poor performance for a myriad of reasons. Yet, it may be worthwhile to re-think how one’s fixed income holdings fits into his/her financial plan and consider whether tweaking the plan may make sense in a rising interest rate environment. For many investors, they have chosen to move money out of bonds and into stocks, attracted to stocks’ often competitive yield, and potential for price appreciation. While this may make sense for a small portion of one’s portfolio, stocks are far more risky than bonds over time and the risk of significant loss in principal may not be worth the gamble.
Another strategy, which I believe is often overlooked, is to use a portion of one’s fixed income portfolio and reduce one’s debt. This may include paying down one’s mortgage, car loan, equity line of credit, credit card balance, etc. This can have an immediate improvement to one’s cash flow yet it doesn’t introduce additional equity risk.
Thoughts and questions are welcome.
Christopher J. Kress, CFA