Higher interest rates: How am I positioned with interest rate risk?

(This article has been updated as of 8/16/18)

This is one post in a series based on our “Quarterly Questions & Answers”. Each post covers one of the important topics we discuss with our wealth management clients.  Today’s topic is:

In today’s market, many are concerned about higher interest rates. How am I currently positioned with interest rate risk?

For years, economists and pundits had been predicting higher interest rates. With interest rates now rising, it’s important to know how interest rate risk affects your investments.

Core bonds play a big role in your typical portfolio – but when interest rates go up, that has an adverse effect on bond values. Simply put, because rates are so low, a small increase in interest rates would erase a lot of principal. So what can you do in portfolios to maintain some income and stability but reduce interest rate risk?

There are a few different ways to handle this – whether it’s investing in shorter duration bonds, buying floating rate bonds or bank loans, maybe taking a bit more credit risk, or investing in a bond ladder. There are pros and cons to each approach – what’s important is that you know how much risk you’re taking.

Next time you talk to your financial advisor, ask them about how much interest rate risk is in your portfolio and how they are proactively managing your portfolio to protect against the risk.

Want to know more? Check out the rest of the posts in this Series:

 

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Barry Glassman, CFP®
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