Should I invest in bonds with high interest rates?

Should I invest in bonds with high interest rates?


Welcome to the newest guide column for Select, Get your money right. Financial advisor Kristen O’Keefe Merrick will answer your most pressing financial questions. (You can read her latest installment here on How to diversify the investment portfolio to reduce risks and losses.) Do you have a question you want to ask? Send us a note at AskSelect@nbcuni.com.

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Dear Christine,

I am a relatively new investor and have so far only invested in stocks. I’ve been reading more about the bond market and I’m not sure if this is the right time for that Start investing in bonds Now that interest rates are up. Can you tell me more about investing in bonds so I can determine if it makes sense for me?

Occurred,

Bondi in Baltimore

Dear Bondi,

This is an incredibly timely question and I’ve been answering it recently for many clients. Before we get into that, I need to provide some context about interest rates and how they align with bonds.

Over the past 15 years, we’ve historically seen low or low interest rates. For many investors, this is the first time they’ve encountered an environment of rising prices, so it’s important that you understand how this price hike could affect your portfolio in the coming months and years – especially since many of the strategies we’ve used over the past few years, With varying degrees of success, it may not be effective with this recent rise in rates.

When interest rates rise, bond prices fall in value. Most bonds pay a fixed coupon (i.e. interest payments) and if prices go up, the only way a fixed coupon can equal a higher interest rate is if the investor pays less for the bond. A bond’s duration is a measure of price sensitivity with respect to a change in interest rates. Duration is a function of maturity, so the longer a bond’s maturity, the longer it will last. So the price of a bond with a longer maturity is more sensitive to change in rates than the price of a bond with a shorter maturity, assuming all other things being equal.

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With that in mind, let’s go back to my previous point. If rates are going up and bond prices are going down, why would I want you to think about bonds?

First, bonds as a general asset class have a lower measure of risk than stocks. Second, bonds generally pay you a coupon — monthly or quarterly, depending on the bond — that provides you with income as part of your investment. As interest rates rise, bonds will pay higher coupons.

However, bonds in general can be complex and not without risk. You need to consider interest rates and credit risk – how much a borrower or issuer is worth – before jumping in.

If you look at shortening the term of the bonds you own, it will help limit the potential damage that can occur if interest rates go up. If you can try to remove interest rate risk by hedging, bonds will be much more interesting.

There are investment strategies that focus on the short term, while others focus more on products that hedge the interest rate on bonds, which essentially reduces risk and makes price movements less impactful.

An example of an interest rate hedging bond strategy is when you invest in portfolios of investment grade or high yield bonds and include internal hedging to mitigate the impact of higher Treasury rates. In most cases, these products do their best to eliminate price risk while short term strategies only limit your exposure. You can also express this in asset classes such as floating rate bonds, bank loans, and Treasury Inflation Protected Securities, or TIPS.

All this can be expressed through exchange-traded funds, also called ETFs, and mutual funds. When looking for funds that suit you best, consider your tracking history and expense ratios before making any decision. You should also consult a financial advisor if you have one.

You’ll want to research products that use the FTSE Corporate Investment Grade Index (Treasury Rate-Hedged) for investment grade bonds or the FTSE High Yield Index (Treasury Rate-Hedge) for high yield bonds as a benchmark to help you make the right decision.

You should also consider your stock portfolio when prices are on the rise. Just because interest rates are going up, it doesn’t mean you can still invest and make money in stocks. However, not all stocks react the same way in an environment of rising prices, so it is important to research this in advance.

Certain sectors such as finance have historically been exaggerated accomplishments. Energy and materials have also performed well due to the increase in prices (inflation) that comes along with higher interest rates.

Personally, I would focus on dividend stocks. These types of stocks are generally considered to have less risk, are historically strong companies with long track records and have cash on hand to keep the market fluctuating — plus they pay you a dividend.

There are many ETFs and mutual funds that focus on this type of investment, which has many names, among which are income equity or dividend-increasing dividend funds. There are also ETFs that you can buy that focus only on rising interest rates and the sectors and stocks that are most closely related to them.

This is a lot to take advantage of as a new investor. My advice is to always do your research, ask questions, and hire a financial advisor if this is too overwhelming for you. My other advice is not to become a bond math expert – it really is the most boring thing in the world. Good luck and God bless you!

If you want to buy bonds via a mutual fund or ETF, consider using a broker that doesn’t charge a commission, such as forefront or devotion. In addition to a robot advisor like Welthfront or to improve They can create a custom portfolio for you based on your risk tolerance, and generally will include bonds in the asset mix they choose for you.

Welthfront

On the Wealthfront secure site

  • Minimum deposit and balance

    The minimum deposit and balance requirements may vary depending on the investment vehicle chosen. Minimum deposit of $500 for investment accounts

  • expenses

    Fees may vary depending on the investment vehicle chosen. Zero account, transfer, trading or commission (money ratios may apply). The annual Wealthfront management advisory fee is 0.25% of your account balance

  • bonus

  • investment vehicles

  • investment options

    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include Real Estate, Natural Resources, and Profit Balances

  • educational resources

    Offers free financial planning for college planning, retirement, and home buying

to improve

On the Safe Betterment website

  • Minimum deposit and balance

    The minimum deposit and balance requirements may vary depending on the investment vehicle chosen. For Betterment Digital Investing, the minimum balance is $0; Premium Investing requires a minimum balance of $100,000

  • expenses

    Fees may vary depending on the investment vehicle chosen. For Betterment Digital Investing, 0.25% of your funds balance as annual account fee; The premium investment fee is 0.40% per annum

  • bonus

    Up to one year of free management service with a qualifying deposit within 45 days of signing up. Valid only for new single investment accounts with Betterment LLC

  • investment vehicles

  • investment options

    Stocks, Bonds, ETFs, and Cash

  • educational resources

    Betterment RetireGuide™ helps users plan for retirement

forefront

  • Minimum deposit and balance

    The minimum deposit and balance requirements may vary depending on the investment vehicle chosen. There is no minimum for opening a Vanguard account, but a minimum deposit of $1,000 to invest in many retirement funds; The Vanguard Digital Advisor® bot advisor requires a minimum of $3000 to sign up

  • expenses

    Fees may vary depending on the investment vehicle chosen. There is no commission for trading stocks and ETFs; Zero transaction fees for more than 3000 mutual funds; $20 annual service fee for IRAs and brokerage accounts unless you choose paperless statements; Vanguard Digital Advisor® bot program charges up to 0.20% advisory fee (after 90 days)

  • bonus

  • investment vehicles

    Android advisor: Vanguard Digital Advisor® IRA: Vanguard Traditional, Roth, Rollover, Spousal, and SEP IRAs Brokerage and Trading: Vanguard Trade else: Vanguard Plan 529

  • investment options

    Stocks, Bonds, Mutual Funds, CDs, ETFs, and Options

  • educational resources

    retirement planning tools

Fidelity Investments

  • Minimum deposit and balance

    The minimum deposit and balance requirements may vary depending on the investment vehicle chosen. There is no minimum to open a Fidelity Go account, but a minimum balance of $10 for robo-advisor to start investing. Minimum $25,000 balance for custom planning and advice

  • expenses

    Fees may vary depending on the investment vehicle chosen. No commission on stocks, ETFs, options trading and some mutual funds; Zero transaction fees for more than 3,400 mutual funds; $0.65 per options contract. Fidelity Go is free for balances under $10,000 (after $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000). Fidelity’s custom consulting and planning fee is 0.50%

  • bonus

  • investment vehicles

    Android advisor: Fidelity Go® and Fidelity® Personal planning and advice IRA: Fidelity Investments Traditional, Roth and Rollover IRAs Brokerage and Trading: Trade Fidelity Investments else: Fidelity Investments 529 College Savings; HSA . fidelity®

  • investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options, and fractional stocks

  • educational resources

    Extensive tools and in-depth industry-leading research from over 20 independent providers

Kristen O’Keeffe Merrick is a financial advisor and financial expert at her family-run firm, O’Keeffe Financial Partners, based in Fairfield, NJ.

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