What About Fixed Income?
Here, the case is less good, which is not to say bad. As bonds usually pay a fixed coupon payment, they do not benefit from faster growth, so they will lose value as rates rise. At the same time, you now get the ability to reinvest those payments at a higher yield. Overall, you will lose a bit in the short term, as prices adjust, but will be generally even or ahead over time, as work by my colleague Peter Essele has shown. The damage in the short term is real, but so is the benefit. No need to panic either way. That is, of course, if rates actually do keep going up, which, as noted, is hardly certain.
A Move Toward Shorter Durations
Here at Commonwealth, we are starting to move our portfolios toward shorter durations, which are less affected by rate increases, but in a measured way. We are preparing for the possibility of higher rates, but we are very aware that now may not be the time. We also know that the benefits of such repositioning are usually not as large as people think. As long-term investors, we are more concerned with those outcomes than with short-term fluctuations.
No Need To Panic
With current rates, any increases are likely to have minor effects on a diversified portfolio, of either stocks or bonds. There is no need to panic. You can make a case for starting to adjust, but those adjustments probably are not going to be substantial—and don’t really need to be.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.