"With the Federal Reserve widely expected to hike interest rates in March for the first of what could be four hikes this year, financial advisers will finally have some good news for their retired clients.
As rates slowly move higher, the safest and shortest-term investments, such as certificates of deposit and money market funds, will start to pay higher yields. Finally.
That's the good news."
However, there's another side to this coin...
"Depending on a bond's duration, a rising-rate cycle could have a punishing impact on some bond portfolios.
For example, a bond with a five-year duration will decline by five percentage points in the event of a one-percentage-point rate hike."
Read the full article from investmentnews.com here.
The dynamic loosely described above is known as interest rate risk. The value of bonds move inversely to the direction of interest rates—a sensitivity that is more pronounced in fixed income securities with longer maturity dates.
This relationship is important for retirees to take into consideration given that their portfolios are typically more heavily weighted in bonds and since they have to continually generate cash over time by selling securities. In today’s rising interest rate environment, a portfolio that has not adequately accounted for interest rate risk could be prone to generate losses that could have otherwise been mitigated.
Because of our specific focus on the retirement stage, True Link works to help manage interest rate risk through specific strategies that seek to match your assets to the timing of your liabilities through the use of bond ladders. Read about our approach to investing to find out more on how True Link’s offering is designed with the retiree perspective in mind.
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