Hi there! Today, I’m having a chat with Pat Murphy, the publisher of Feeling Financial, about how to keep your investments safe. Pat writes about personal finance, focusing on how our emotions and behavior impact financial outcomes.
Right now, it’s tough to maintain a conservative mix of investments. With the threat of rising interest rates, even traditionally “safe” investments are starting to look risky.
Over the past few months, I’ve lost some money in an account I consider somewhat “safe.” This is money I might need in the next few years, so I invested about 70% in bond funds and 30% in stock funds. I want a balance—I don’t want to lose it all in a stock market crash, but I would like it to earn more than what banks offer. Although the account is still positive over time, I’m disappointed by the recent losses.
I suspect many people are in the same situation: those relying on bonds for stability might be in for a rough ride.
Bonds have traditionally been seen as safe, but you wouldn’t think so by looking at your last quarterly statement. Sure, any investment can lose money, but aren’t bonds supposed to stabilize a portfolio? The truth is, bonds can lose money, especially as interest rates rise. Interest rates are extremely low right now, so they’re likely to go up. We’ve seen this coming for a while, but things got messy in May when the Fed hinted that rates might eventually rise.
So, what can we do if bond losses result from rising interest rates? We can lighten up on the types of bonds that tend to lose money when rates go up. Generally, safer bonds with long durations lose value as rates rise.
While I’m not one to time the markets—I don’t think I’m smart enough for that—it’s still worth considering a move to bonds less likely to get hit hard by rising rates. For example, my medium-term money can go into these bonds, but I’m not making big changes to my retirement accounts. I’m not interested in drastic shifts like moving to cash and then trying to jump back into the market.
Some bonds or bond mutual funds could fare better as rates rise:
1. **Short-term bonds:** These don’t suffer as much as long-term bonds because you get your money back faster, allowing you or the fund to reinvest in newer, higher-paying bonds. However, they generally pay less than long-term bonds.
2. **Floating-rate bonds:** These can be even shorter-term than short-term bonds and usually involve variable rate loans that banks make to companies. As rates rise, the interest on these loans can also increase, passing the higher income to investors. They tend to yield more but are riskier.
3. **High-yield bonds (junk bonds):** These pay high interest rates because they are high-risk. Though not necessarily short-term, they can be insulated from rising rates if the issuing companies get stronger, making the bonds more attractive and increasing their price, which offsets rate-related declines.
There are trade-offs with these strategies. Rates might not rise quickly or at all, meaning moving to short-term bonds would leave money on the table. Also, floating-rate and high-yield bonds are riskier because the issuers might run into trouble and stop paying bondholders. These investments are more volatile, moving up and down like stocks. If the economy slows, safer bonds might be better.
Besides bonds, there are other types of investments, like “alternative” investments that might help as rates rise. The challenge is determining how much to allocate to each type.
Given all that, I plan to make modest shifts in my bond portfolio, not going all-in on short-term and high-yield bonds. Keeping some traditional bonds will help maintain stability and interest if rates don’t rise, while adding more short-term and high-yield bonds should help weather potential rate increases.
How do you keep your “safe” investments safe? You can find Pat over at Feeling Financial or on Facebook.