What to Do When Interest Rates Rise

The Oxford Portfolio Update – January 15, 2009 (Broadcast #838)

Rising interest rates will decimate a bond portfolio.

That’s because the bond market is remarkably simple. It’s a seesaw, with interest rates on one end and bond prices on the other. When one goes up, the other goes down. And since the Fed sets the “official” benchmark, you don’t need to be a genius to figure out that rates have nowhere to go from here but up. And in turn, prices will fall.

So how do we combat this imminent collapse in bond prices?

The easiest way is to hold a bond until maturity. But, no offense, that’s not realistic advice because most investors trade bonds like stocks these days. Virtually nobody holds them until maturity.

Thankfully, there’s an alternative for us impatient types…

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