Rising Interest Rates & The Bond Market

Last week I had a conversation with someone who was frustrated when they opened their 4th qtr. statement. They started the discussion off with something like this: “I don’t understand, all I hear in the news is how the stock market is at all-time highs, but then I get my account statement and see that I’ve actually lost money. Do I need to change something? It doesn’t add up!”

For the next 45 minutes, I rolled up my sleeves and did what I love most about my job – teaching people. I began by asking where he thought he’d lost money. “The stock market, I guess”, he replied. As we examined his statement, I was able to pinpoint the culprit. His equity holdings (fancy word for stocks) did not decrease in value, they went up! It was the more conservative bond piece of the allocation that had moved backwards. The breakdown of his account was about 40% stocks/ 60% bonds, a fairly conservative mix by most standards. I explained that more conservative investors have been able to lean on fixed income (fancy word for bonds) investments over the past 2 decades as a bit of a safety net, however, the interest rate environment appears to be changing its course. I reminded him that bond prices generally move in opposition to interest rates, such that when rates rise, the value of current bonds issued tends to fall.

His initial comment was, “So what does that mean for me? Do I need to move all my money to stocks?” What we did next was boring and often overlooked. I sent him a Risk Survey Questionnaire. After completing the seven question quiz we got better sense of how he needed to be invested going forward. We also discussed that his account was actually more conservative than he realized. We concluded that he no longer should be allocated in a 40/60 mix. Instead, the more stock-heavy approach of a 60/40 allocation (60% stock) looked to be a better fit.

We believe in asset allocation – the overall mix of types of investments within your portfolio is an important factor in determining a successful investment experience over the long-term. Somebody much smarter than me (not too hard to find) once told me, “Most markets deliver about the same rate of return, they just don’t do it at the same time. Saving for retirement is a marathon, not a sprint. If investors are going to get the bad (market drops), they at least ought to stick around for the good.”

In December 2016, the Federal Open Market Committee (The Fed) raised rates. Interest rates and fixed income investments usually have an indirect relationship and “The Fed” has said it hopes to raise rates three more times in 2017. This likely makes you think, “Well, what about my account? Do I need to make a change?” The answer for you will be the same: Let’s have a conversation similar to the one above. Let’s visit about your risk tolerance, how much time you have left to work/save, and what allocation is right for you moving forward.