How can I protect myself from, and/or take advantage of, rising interest rates?
[david ott, partner, acropolis investment management]
If your portfolio is mostly comprised of stocks and bonds, rising interest rates will likely have more impact on your bonds than your stocks. Broadly speaking, bonds have two kinds of risks. The first, called credit risk, is associated with the credit-worthiness of the issuer. The second, term risk, is related to the term or duration of the bond. When interest rates change, the value of the bond is impacted: when they rise, bond prices fall—and vice versa. The duration magnifies those changes, so that shorter-term bonds change less and longer-term bonds change more when interest rates shift.
If you’re worried about rising interest r ates, the primary way to reduce risk is to shorten the duration of the portfolio. But that could hurt your return if you guess wrong. For example, rates could fall further, like they have overseas, or stay the same for many years.
The starting place for a bond portfolio, in my opinion, is simply owning the entire bond market through an index fund or an exchange-traded fund that tracks the Barclays Aggregate index, much the way that people do with stocks. There are many low-cost choices. Once this core position is established, it may make sense to adjust the credit risk or term a bit, to make sure the portfolio meets your financial goals and is within your risk tolerance.
[matt balc
er, managing director, f&b financial group]
Interest rate volatility can be stressful, especially when you’re shopping for or thinking of building a home. To protect our clients in a rising rate environment, we utilize a few strategies to make sure they receive the best financing package for their particular situation. For example, long-term rate locks can guarantee a client’s rate for as little as 30 days or as long as a year. This is especially useful when you’re building a home and the project is scheduled to be completed in eight or nine months. Also useful for relieving anxiety over market fluctuation is a ‘lock and shop’ feature, which allows you to lock in a low interest rate while you begin or continue to shop for a home.
We also offer clients a zero-cost refinance. This ensures they will never miss the bottom of any market. The interest rate at which they close their loan today might be the lowest it will ever get, but if the market provides an opportunity for a better rate in six months or six years, we’ll restructure their loan at no cost.
By Tony Di Martino
