After acquiring a little bit of money, you’re probably look into different places to put it. One of the options that you may choose is a bond portfolio. When you make such a choice, it’s important to realize that an interest rate risk does exist. How can you protect yourself against this situation?
Discussions with Professionals
Every situation is going to be a little bit different from the next, and you want to be sure that you have a clear view of your personal circumstances. If you do not have an accountant or a financial planner, it’s time to get one. Discuss your concerns with this individual, figure out a plan to decide how you are going to monitor the problem and ask all of the questions that you need to. If you feel that the professional is not providing you with sound advice, be sure to find someone else with whom to work. Financial decisions always require the utmost care.
The Ezine article “How to Protect Your Bond Portfolio Against Interest Rate Risks” by Chris Borg discusses the necessity of choosing different maturation times for the bond. Borg writes, “When you consider investing in bonds, you should strive to purchase bonds with staggered maturity dates. Some financial advisors refer to this as laddering your bonds. Essentially, what that means is that you would like to have your bonds mature in different years such as 2023, 2024, 2025 and so on. This tactic will give you protection against what is known as interest rate risk.” Ultimately, you can get more back at the end if you stagger these dates.
Studying the Trends
You also do not want to just dive into the field of bond portfolios without understanding what the trends have been in the last several years or decades. In fact, Neuberger Berman’s article “Protecting Bond Portfolios from Rising Rates” suggests that assessing the past “interest rate cycles” is extremely important for investors. For example, as the article indicates, the average 10 year change from August 1986 to January 2010 was 174.
Fixed Income Portfolios
Neuberger Berman also suggests looking into fixed income portfolios because these can help to protect you against the interest rate risk. As the name implies, the rates are fixed. When you have a variable interest rate, no matter what type of investment or loan you have, you are at a major risk. You could wind up paying so much more money than you ever intended to or that you can really afford. The article notes that “Actively managed fixed income portfolios…serve to reduce the interest rate risk in bonds,” clearly indicating that these are likely the types of portfolios in which you should invest your money.
Before you can make any final decisions regarding this matter, you really need to look into all of the different options are available. Carefully comb through them with your financial adviser, and you can develop a plan that works to bring the most benefits to you.
This is a guest post by Jason Harter, whoi has managed mutual fund portfolios for over 20 years. He obtained his masters degree from of the the 10 Best Online Master’s Degree Programs in Finance