What to Do About Investments if The Fed Raises Interest Rates

I’m going to spend the next couple of blogs talking about the horrifying (sarcasm) specter of rising interest rates.  This is in hopes that I won’t have to talk about it for the rest of the year.  Yeah, right.

If you spend any time watching/reading financial news prognosticators, (which you shouldn’t because it’s bad for your attitude and gives you pimples) you will hear a LOT about the impending doom of the Federal Reserve raising interest rates.  What should an investor do?  Sell bonds now?  Sell stocks now?  Sell bonds on Tuesday?  Buy stocks at the next full moon?

My take is that if you have a diversified portfolio that makes sense for your time horizon and risk tolerance, you should DO NOTHING in response to the Fed’s meetings, testimonies, beige book notes, actions, non-actions, bowel movements, or changes in hairstyles.

For one thing, rising interest rates means that someone finally thinks the economy is healthy.  This has historically meant a bump up in stock prices. Yay!

“But, what about my bonds?” you say in a trembling voice. First of all, remember why you have bonds in your portfolio.  Is it to make huge amounts of money each and every year?  No, it’s to provide stability during rough stock market times.

Second, think about the way your have your bond money invested.  If you are in individual bonds that you intend to hold until maturity, the change in prices from now until the maturity date don’t matter to you.  If the bonds are high quality, you’ll be getting your par value (usually $1,000/bond) back on that pre-determined date, so don’t worry about it.

If you are invested in bond funds, remember, the bond fund managers are getting new cash in all the time in the form of interest payments, maturing bonds in the fund, and new money from investors.  They can take all that new money and buy the newer, higher interest rate bonds with it.  The interest rate the fund pays goes up, and yes, the price of the bond fund may drop temporarily, but it will come back eventually.  Keep your shirt on.

Next week, how to position your bonds to whether a rising interest rate environment.

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