Rising Interest Rates and Your Portfolio
In fear of what is considered an inevitable rise in interest rates, many investors are beginning to speculate whether or not fixed income still has a place in their portfolio. (Note: In general, as interest rates rise the price of existing bonds declines)
It may be hard to remember that we have been through such periods of rising rates before. Below illustrates previous periods when the Federal Reserve System increased the benchmark Federal Funds Rate: (See footnote for explanation of Fed Funds Rate)
- 1991: Increased from 3.25% to 6.0%
- 1999: Increased from 4.75% to 6.5% in less than a year
- 2004: Increased from 1% to 5.25% (mid-2003 to mid-2006)
Fixed income (as measured by the Barclay's Aggregate Bond Index) had an annualized return of 5.17%, 6.01%, and 3.98% respectively during these periods. These returns may seem somewhat modest, but they're a far cry from the catastrophic scenarios the doom-and-gloomers would have you believe.
Remember, there is always risk of an unforeseen pull back or recession in the marketplace. In such situations, fixed income has historically proven to limit losses. A rise in rates will impact the fixed income portion of your portfolio, but it is unlikely to be categorically detrimental. What can be detrimental is letting the fear of rising rates cause you to abandon fixed income and take on more exposure to equities than is suitable for your particular tolerance for risk.
Never hesitate to call us with questions or concerns or to review your portfolio.
Mark. E. Engberg, CFP®
[Footnote: The Federal Funds Rate is known as the overnight lending rate and is the interest rate that banks actively trade cash balances held at the Federal Reserve. Banks with surplus balances lend those funds to banks in need of balances or reserves. The current Fed Funds Rate is approximately 0.13%. http://www.federalreserve.gov/releases/h15/current/ ]