ENSURE YOUR “SECURE” INVESTMENTS REMAIN PROTECTED

ENSURE YOUR

Hello! Today I’m chatting with Pat Murphy, the publisher of Feeling Financial, about keeping your investments safe. Pat specializes in personal finance, focusing on the impact of emotions and behavior on financial outcomes. Let me know if you’re interested in submitting a guest post.

Over at Make Money Your Way, Eva from TeensGotCents is discussing how to make money in college and graduate debt-free.

These days, it’s tough to maintain a conservative mix of investments. Even supposedly “safe” investments are looking risky with the possibility of rising interest rates.

In the past few months, I lost some money in an account meant for “safe” investments, which I might need in the future. I allocated about 70% to bond funds and 30% to stock funds. While I want better returns than a bank offers, I don’t want to risk losing everything in a market crash. Although the account is still positive overall, the losses are disappointing.

Many people are likely experiencing something similar. Those who rely on bonds for stability are in for a rough ride.

Bonds Losing Money

Traditionally, bonds are seen as safe, but recent quarterly statements might suggest otherwise. Bonds are supposed to stabilize a portfolio, but they can lose money. With interest rates poised to rise, traditional bond investments might lose value. Given the current low-interest rates, they have nowhere to go but up. Although this has been anticipated for some time, things became uncertain in May when the Fed hinted that rates might increase eventually.

What Should Investors Do?

If bond losses result from rising interest rates, what can investors do? One strategy is to reduce investments in bonds that lose value when rates go up. Typically, safer bonds with long durations tend to lose value as rates rise.

While I don’t believe in timing the market (I’m not savvy enough for that), it’s reasonable to move some “safe-ish” money into bonds less likely to be affected by rising rates. For instance, I might shift my medium-term money but not my retirement accounts. I don’t plan on making drastic changes or trying to avoid a market crash by moving to cash and then reinvesting.

Certain types of bonds (or bond mutual funds) seem to perform better when rates rise:

– Short-Term Bonds: These bonds don’t suffer as much as long-term bonds because you get your money back quicker, allowing for reinvestment in newer, higher-paying bonds. However, they generally yield less income.

– Floating-Rate Bonds: These have shorter time frames than short-term bonds and often include variable-rate loans from banks to companies. As rates rise, the interest on these loans increases, benefitting investors. They usually offer higher yields but come with added risk.

– High-Yield Bonds (Junk Bonds): These bonds pay high-interest rates due to their high-risk nature. While not necessarily short-term, they can avoid rate-rise impacts if issuers’ financial situations improve, making the bonds more attractive.

What’s the Catch?

There are trade-offs with shorter-term and higher-risk bonds:

1. Rates might not rise or may rise slowly. In such cases, moving to lower-paying short-term bonds means missed earnings.
2. Floating-rate and high-yield bonds are riskier than traditional bonds because the issuers might face financial troubles. They are more volatile and can fluctuate like the stock market. In a faltering economic recovery, safer bonds might be preferable.

Additionally, other types of investments might be beneficial as rates rise, but determining the right balance can be challenging. A well-rounded portfolio typically includes some bonds for stability.

My Plan

Given these considerations, I plan to make modest adjustments to my bond investments. I’ll retain some traditional bonds for stability while increasing short-term and high-yield bonds to better handle potential rate increases.

How Do You Keep Your “Safe” Investments Safe?

You can find Pat at Feeling Financial or on Facebook.