Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

How Rising Interest Rates Will Affect You

Stock-Markets / US Interest Rates Aug 30, 2013 - 10:15 AM GMT

By: Investment_U

Stock-Markets

Marc Lichtenfeld writes: According to a survey, 63% of investors don’t know how rising interest rates will affect their portfolios.

They should, because rates are climbing fast. The 10-year Treasury is at nearly 3%. Just three months ago, it was under 2%. The 10-year Treasury yield can affect mortgage rates, interest rates on credit cards… and especially your portfolio.


If you’re one of the 63%, let me explain what continued rising interest rates will mean to you.

You will lose money in bond funds. Bond funds own bonds in their portfolios. When interest rates rise, bond prices fall because the lower-rate bonds are less valuable.

Think about it. Suppose you bought a 10-year bond paying 2% a few months ago. And today the 10-year bond yields 3%. If you wanted to sell your bond, you would have to sell it at a discount. No one would pay the same amount you did for a bond that yields less than what can be obtained in the open market.

So bond prices fall when rates go up. As a result, bond fund prices fall as well because the value of the bonds they own goes down.

The problem is that unless yields fall again back to all-time lows, the bond fund prices will not recover. Even if you’re a long-term investor, you’ll lose money. You’ll continue to receive income from the funds, but chances are that when you sell the fund, you will receive less money than you paid for it.

If you insist on staying in bond funds, be sure they’re short-term. The shorter time to maturity, the less the damage will be.

You don’t have to lose money on individual bonds. If you own individual bonds – whether they’re investment-grade corporates, junk bonds, munis or Treasurys – hang on to them until maturity.

Although the bond prices will fall if rates rise, that won’t matter when the bonds mature and you sell them at par ($1,000 per bond in most cases).

Let’s say you bought a corporate bond for $1,000 with a yield of 4% and it matures in 10 years. Your bond value might slip to $900 as rates go higher. But you’ll continue to collect your 4% per year, every year. At maturity, no matter where interest rates are, the company will pay you back your $1,000.

So if you’re going to buy or own bonds, be sure the plan is to own them until they mature and you’ll get your principal back.

Dividend stocks could fall temporarily. You might be shocked that I’m saying this since I’m The Oxford Club’s dividend guy. But it’s the truth. If investors can get yield from a Treasury or other high-quality bond without taking stock market risk, some will do so.

That could lead to a temporary sell-off in dividend stocks. We’ve already started to see some stocks, such as utilities, slide as rates dramatically rose in August.

But for long-term investors, it doesn’t matter. If your dividend stocks fall, you can buy new shares at lower prices.

And if you reinvest your dividends, a falling stock price is the best thing that could happen to you. Your reinvested dividends will accumulate more shares, which will spin off more dividends, which will buy more shares, which will spin off more dividends…

Stocks go up over the long term. Dividend-paying stocks outperform the general market. So long-term investors shouldn’t be worried about any short-term sell-offs.

The stock market doesn’t have to fall after rates rise. In fact, quite the opposite. Look at the chart below that pits the S&P 500 against the yield on the 10-year Treasury. You’ll notice that from 1999 to 2010 the two were pretty much in sync. It wasn’t until 2010, when the Fed began its quantitative easing program, that the two lines started to diverge.

As you can see, even the latest surge in the 10-year Treasury yield did not stop the market from going higher.

If rates shoot higher when the Fed puts the brakes on quantitative easing, there will likely be scared investors everywhere. Now that you’re one of the 37% instead of the 63%, you’re more likely to profit from others’ panic.

Good investing,

Marc

Source: http://www.investmentu.com/2013/August/how-rising-interest-rates-will-affect-you.html

http://www.investmentu.com

Copyright © 1999 - 2013 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules