Interest rates are constantly changing. But how do rising or falling interest rates affect your investment strategies?
There’s no simple answer. If you own stocks, higher interest rates could be a cause for concern, because when interest rates rise, it becomes more expensive for companies to borrow to expand their operations. As a result, these businesses may feel a squeeze on profits and stock prices. And yet, some businesses are more affected by rising interest rates than others. So investors can’t base your actions on a blanket statement such as: “Higher interest rates are bad for all stocks.”
The situation is a different if you own fixed-income vehicles, such as bonds. When interest rises, the value of your bonds fall. That’s because no one will want to pay you the full price for bonds when he can buy new ones issued with higher interest. To sell yours, you’d have to offer them at a “discount” to their face value. On the other hand, if interest rates fall, the value of your existing bonds rise.
If you’re like many people, you don’t buy bonds just to sell them. You want to hold them until maturity, when you can expect to get your principal back, assuming it’s a quality bond. And, along the way, you’ve gotten interest payments.
However, even if you do plan on holding bonds or certificates of deposit until maturity, you might want to pay attention to what’s happening with interest. After all, if you depend on bonds or CDs for income, and rates are down when these investments mature, you could face a difficult choice: Should you buy new fixed-income vehicles at current rates, or should you “park” your money somewhere and hope for rates to rise again soon?
Fortunately, you can find a better solution than either of these options. How? By building a “ladder” of fixed income investments. To build a ladder, you buy a variety of fixed-income vehicles — any combination of corporate bonds, U.S. government-sponsored enterprise and/or Treasury securities, municipal bonds or certificates of deposit with a wide range of maturities.
Once you have established a bond ladder, you are prepared for both rising and falling rates. When rates are rising, the proceeds from your bonds can be used to invest in new ones at higher levels. When market rates are falling, you’ll continue to benefit from the higher rates offered by your longer-term bonds.
Cardella is a financial advisor with Edwards Jones in Hinesville.
There’s no simple answer. If you own stocks, higher interest rates could be a cause for concern, because when interest rates rise, it becomes more expensive for companies to borrow to expand their operations. As a result, these businesses may feel a squeeze on profits and stock prices. And yet, some businesses are more affected by rising interest rates than others. So investors can’t base your actions on a blanket statement such as: “Higher interest rates are bad for all stocks.”
The situation is a different if you own fixed-income vehicles, such as bonds. When interest rises, the value of your bonds fall. That’s because no one will want to pay you the full price for bonds when he can buy new ones issued with higher interest. To sell yours, you’d have to offer them at a “discount” to their face value. On the other hand, if interest rates fall, the value of your existing bonds rise.
If you’re like many people, you don’t buy bonds just to sell them. You want to hold them until maturity, when you can expect to get your principal back, assuming it’s a quality bond. And, along the way, you’ve gotten interest payments.
However, even if you do plan on holding bonds or certificates of deposit until maturity, you might want to pay attention to what’s happening with interest. After all, if you depend on bonds or CDs for income, and rates are down when these investments mature, you could face a difficult choice: Should you buy new fixed-income vehicles at current rates, or should you “park” your money somewhere and hope for rates to rise again soon?
Fortunately, you can find a better solution than either of these options. How? By building a “ladder” of fixed income investments. To build a ladder, you buy a variety of fixed-income vehicles — any combination of corporate bonds, U.S. government-sponsored enterprise and/or Treasury securities, municipal bonds or certificates of deposit with a wide range of maturities.
Once you have established a bond ladder, you are prepared for both rising and falling rates. When rates are rising, the proceeds from your bonds can be used to invest in new ones at higher levels. When market rates are falling, you’ll continue to benefit from the higher rates offered by your longer-term bonds.
Cardella is a financial advisor with Edwards Jones in Hinesville.