Investors, especially those seeking income, are faced with the challenge of positioning their portfolios in today’s historically low interest rate environment while preparing for the inevitable rise in rates. While most market strategists agree that rates have nowhere to go but up, the question is really around timing and severity—when will they move and how quickly.

The Federal Reserve began to aggressively lower interest rates in 2007 as the recession took root. Beginning in September of that year, the federal funds target rate was lowered 10 times, bringing the rate from 5.25% to 0.25%, where it stands today. The market downturn, coupled with monetary policies designed to provide liquidity to the financial system and skittish investors seeking safety in fixed income securities, only compounded the situation. As we see signs of optimism creeping back into the economy, investors are confronted with the challenge of the potential impact rising rates can have on their total return.

When it comes to interest rates, change—or even the expectation of change—can have a significant impact on bond prices. Generally speaking, when interest rates rise, prices of existing bonds drop. This is because demand decreases when newer bonds that are paying higher rates attract more investors with better yield. Therefore, with the prospect of rising rates, investors are looking for ways to reallocate their bond portfolios to protect against a drop in value. While it may seem intuitive to sell a security you feel is goingto lose value, it could actually do more harm than good. In comparison to stocks, bonds are typically less volatile, provide a consistent stream of cash flow, and include a contractually specified return of principal. While there are no guarantees, especially in instances of default, bondholders have stronger legal rights than stockholders.

Before making any decisions, it is important to step back and revisit your primary investment objective. If you are buying bonds for the cash flow to meet some future liability, than potential interest rate 
movements likely take a back seat. Similarly, if you turn to bonds to dampen overall volatility in a well-diversified portfolio, you should continue to regularly rebalance while ensuring your allocations are properly aligned. However, for investors seeking total return, now might be the right time to reevaluate
their portfolios. In fact, a rising rate environment can actually provide some unique opportunities for investors who plan ahead. Depending on your circumstances, you may consider including floating-rate securities, dividend-paying stocks, or Treasury Inflation-Protected Securities. Also, you could benefit from a laddered bond portfolio structure or employing a bond swap strategy to take advantage of the market environment.

To learn more about the impact of rising rates on your investments and what strategy might be best for you and your family, call one of our Financial Advisors to schedule an appointment today.