Q. I know when interest rates go up, bond prices will fall. Given that everyone expects the Fed to raise interest rates soon, what is a good Bond strategy now?
A. Consider the following strategy in today's volatile bond market:
A. Consider the following strategy in today's volatile bond market:
- If you are a long term investor and intend to hold individual bonds to maturity or invest in fixed income for diversification, there may be no reason to change strategies due to rising rates.
- If you are concerned about price impact and income, consider incorporating a range of different kinds of bonds and non-bond income options.
- Build up a diverse bond mix, consider Treasuries, investment-grade corporate bonds, munis, and, if you have higher tolerance for risk, high-yield or foreign bonds.
- Beyond traditional bonds, dividend-paying stocks, REITs, preferred securities, and commodities may augment an income portfolio.
- You have the option of reducing your overall fixed income allocation, though timing investments based on market outlooks may be challenging.
- Adjust your portfolio allocations toward shorter-duration bonds, which typically offer lower yields but may suffer smaller price declines if rates rise.
- Additionally, some bonds may have favorable reactions to changing market conditions that partly offset price declines. TIPS may increase payments if inflation rises, and floating-rate notes may adjust to rising interest rates.
- A ladder of individual securities or defined maturity funds can help to manage interest-rate and reinvestment risk.
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