What To Do about Interest Rates

August 11, 2015

fb-interestratesInterest rates have been low for many years now, and while nearly everyone agrees that rates will rise eventually, no one knows exactly when rates might rise or how they might rise.

Given all the uncertainty, are you better off avoiding bonds? We believe this only swaps one risk (higher interest rates) for another.

Most investors need exposure to bonds to help buffer the volatility of their stock fund positions. In volatile markets, investors who don’t hold bonds may regret not having the buffer in place. Investors who sell out of bonds also will have to determine when to buy back in, and we don’t know of anyone who can time those moves perfectly.

So what to do instead?

1. Focus on what you can control

We have no control over when interest rates might rise, how they might rise, or how the markets might react. But we can control how we react to changing markets. NoLoad FundX’s Upgrading strategy helps us avoid making emotional changes to our portfolios, and instead leads us to make changes based on recent fund performance.

2. Think long term

Most of us need to be invested long term in order to reach our goals, and up and down periods in the stock and bond markets are part of long-term investing. While interest rates may affect the bond market, they don’t alter our goals and they shouldn’t derail our long-term plans.

3. Follow your discipline

Our active strategy is designed to adapt to changing markets, and it has a proven history of doing so. When interest rates rose in 2006, we moved into shorter-term funds, floating rate funds and low volatility equity funds, like balanced funds. In the 2008 credit crisis, NoLoad FundX’s fixed income portfolio owned short- and intermediate-term government bonds. We didn’t have to predict either of these changes in advance; we just had to stick with our strategy.

4. Balance your portfolio

Investors who hold both stock and bond funds may be better able to weather interest rate changes. Stocks aren’t as correlated to gradual rate hikes, and gains from stocks could compensate for losses from bonds. And if stock market volatility picks up, bonds could help cushion the volatility of stocks.

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Chuck Coletta August 11, 2015 at 4:14 pm

It seems to me there is more to lose than gain with bond funds at the moment. There isn’t much room for interest rates to go down, which would improve the value of your bond fund. If the rates go up, the funds take a hit. I think the allocation typically reserved for bond funds right now is better served with low-risk, high yield stock dividend funds or even cash.

All in my humble opinion. 🙂

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