Presented by Karen L. DeRose, CFP®, CRPC
Lincoln Financial Advisors
What drives interest rates – inflation and economic growth? With neither in sight, what is one to do? Historically bond yields have fallen over the past 30 years and rose from 1949 – 1979. (Wall Street Journal) For the short term, there is concern of another round of quantitative easing which will result in lower interest rates. Eventually rates will start to rise and you may want to consider these strategies for your portfolio.
For low risk, you can purchase short term CD rate’s and low duration bond funds. Bank CDs are FDIC insured and offer a fixed rate of return. The average intermediate-term bond fund has duration of 4.4 years, short term 1.8 years and ultra short 0.6 years. This way if rates start to rise and you want to invest in higher yielding fixed instruments you can. Bonds have fixed principal value and yield if held to maturity. Bonds have inflation, credit and interest rate risk. Prices of fixed-income securities may fluctuate due to interest rate changes. Investors may lose money if bonds are sold before maturity.
If you are willing to take on some risk, High Yield Bonds have historically they have performed well during rising interest rates. (Wall Street Journal) High yield bonds experience higher volatility and increased credit risk when compared to other fixed income investments. Convertible bonds pay a regular coupon as well and you get the option of exchanging the bond into a stock, which translates in to less sensitivity to market yields. TIPs (Treasury Inflation Protected Securities) rise with the consumer price index and could be a good mix to have as part of your fixed income. TIPS have different cash flow characteristics than fixed income securities. TIPS offer a lower current return to compensate for the inflation protection than comparable Treasuries. The inflation adjustments to the principal are taxable in the year in which such adjustments occurs even through you won’t receive your inflation-adjusted principal until the security matures. TIPS should be purchased in a tax deferred account.
Dividend paying stocks are another strategy. The Dow Jones has an average yield today of 2.6% vs. the 10 year Treasuries at 2.5%. (Wall Street Journal) Remember, there is a trade off for dividends as compared to growth in the underlying stock. You want the dividend to be high, yet still afford appreciation potential in the stock.
Lastly, commodities are volatile, yet can act as a hedge against inflation. These are precious metals, grains, livestock, industrials etc.
The best strategy right now is to diversify your investment strategy to your objectives and segment it into short, intermediate and long term investments, this way you not taking risks with any one strategy. A portfolio investment strategy should be aimed at balancing risk and return and a portfolio should be divided between equities and fixed-income securities.
This information is an assessment of the market environment at a particular point in time and is not intended to be a forecast of future events, or a guarantee of future results. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Statements regarding future prospects may not be realized and may differ materially from actual events or results.
Karen DeRose, CFP®, CRPC is a registered representative and investment advisor representative of Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor, 8755 W. Higgins Road, #200 Chicago, IL 60631 773-867-3670 offering insurance through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was provided to you by Lincoln Financial Advisors for its representatives and their clients. CRN201010-2047124
