Earlier this month, I was featured in a Money magazine article where I answered a reader question about the Fed affecting bond prices and returns.
We’ve seen that investors are increasingly jittery about the Fed potentially raising rates later this year. But, what investors need to know though is that the Fed will not directly affect interest rates on your mortgage, car and credit card. These things, and fixed income in your portfolio, are instead indirectly influenced by Fed changes, as it is the state of the economy that will ultimately determine what will happen in the future to prices.
Here are a few takeaways for readers when it comes to changes made by the Federal Reserve:
Stay the course, especially with bonds
You’ll see that the prices of bonds, and their market value, will go down to make up for any increase in interest rates. However, a bond held until maturity, will pay off at par. Fort Pitt has focused on setting the stage for good investments in fixed income for our clients, and we’re going to stick with those ideas and reinvest when the Fed does raise rates at a more favorable level.
Consider a laddered approach
We urge investors to hold onto bonds because we believe that they will pay off over the long term. Consider a laddered approach for investments, so as shorter maturities roll off, you can reinvest that money at higher rates because those rates have been adjusted.
Don’t let media sway your investment philosophy.
The media, especially over the last few months, has focused a great deal of attention on when the Fed might raise rates. Don’t let the hype around any changes impact your long-term investment philosophies. The media is pumping this up as a huge, symbolic event, and while it is considerable, it should not drastically alter your behavior toward fixed income in your portfolio.
Overall, no matter what the Fed decides later this year, fixed income investors should remember the importance in staying the course and remaining disciplined in their long-term investment approach.