High Interest Rates Prediction -- Testing Phase for Investors
A dilemma that investors now face is how to manage their investments in the face of rising interest rates. In the next two or three years, interest rates are predicted to increase, which could greatly affect bonds and stocks alike.
Long-term investments are not affected unduly by a change in interest rates. But investors with retirement savings need to look into how they distribute their investments. Diversification is strongly recommended as this is by far the best method to stop losses that the fluctuating market can bear down on investments. Investing in different asset types and over several locations and industries will ensure safe and steady growth of the investments. The Advantage Dow Jones Target mutual funds created by Well Fargo group has excellent retirement investment plans that feature the following.
- Conservative allocation of funds, based on the income earned over a period of time.
- For investors who will get a regular income for a minimum of 20 years in future, the assets are divided and invested in domestic, foreign stocks and in bonds as well as securities that give a regular income.
- Stock holding involving diverse industries like technology, financial institutions, consumer cyclical stocks and other industries is more advantageous.
The downright low-interest rates that the Federal Reserve gives on CDs make it impossible for conservative savers to get any profits. The 0.25% interest rate for short-term funds is very hard on the relevant savers. For a 12-month period, a CD gets only 0.2% interest, while a 5-year period gives an interest of 0.78% as revealed by Now Health International. The savers with low-risk tolerance are thus affected more.
The present bullish trend along with an expected increase in interest rate can cause a downturn in the stock prices. Another issue of concern is declining bond prices with long term rise in the interest rates. The reason for fall in bond prices is the issuing of new bonds at higher prices. If bonds that have similar ratings can balance the lowered prices to respond to the price of new bonds, the fall can be circumvented.
Bonds have a Hard Time
Though the rise in the interest rates of long-term investments have been in the talks since 2013, with the Federal Reserve starting to lower the bonds it purchases, the rates have dipped to an all-time low. The beginning of 2014 saw the treasury bonds in the U.S. go down to 2.65%. While the rate was at 1.89% in 2012, it had increased considerably to 3.04% in 2013. While the 60-month treasury bonds had given a return of 0.77% in 2012, it rose steadily to 1.75% in 2013, but went down to 1.49% in the beginning of 2014. With the purchase of bonds by the Federal
Reserve to be halted with 2014, the interest rates in the long term are expected to soar uninhibitedly.
The impact of the higher interest rates may not influence the investment strategy of long-term investors, but the short-term investors need to look carefully at the bonds and stocks before investing in them.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.