Guidance when interest rates are rising

If you’re thinking about switching from bonds to dividend-paying stocks, here’s why you may want to exercise some caution.

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Notes:
  • All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
  • Bond funds are subject to the risk that an issuer will fail to make payment on time, and the bond prices will decline because of rising interest rates or negative perceptions of an issue’s ability to make payments.
  • This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
  • Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

© 2017 The Vanguard Group, Inc. All rights reserved.

TRANSCRIPT

 

Emily Farrell: Mickey asked us, “Since Fed rates are expected to increase, doesn’t it make sense to reduce bond holdings and maybe even move to total equities for a more assertive investor?”

Bryan Lewis: It’s a great question. So when you start looking at interest rates going up, you know, the Fed, I mentioned earlier, has talked about they may increase rates maybe a couple more times this year. There’s no guarantee that actually is going to happen, and we’ve seen this in the past. How many years have people been talking about interest rates going up, and, obviously, look where we are today. But there’s things domestically and abroad that could deviate the strategy the Fed has.

As far as going all equity, it varies. It depends on your personal risk tolerance. So a lot of investors cannot withstand the volatility or the price fluctuations with equities. I think a trend that we saw for a while, or at least the questions that I get from my clients, is why go into bonds if rates are going to go up? Why not go to a dividend paying stock or equities where they potentially could make more money? Well, we have to think about the role of bonds. Right? They’re there to provide stability.

I think of it as driving a car. You’re going down the street. Your foot’s on the accelerator. For maybe a younger investor who’s far away from retirement, so they have a long time frame, they’re going fast versus somebody who’s approaching retirement, you’re going to apply the brake to slow down. And really the idea with bonds is to add stability. And, of course, they’re going to generate some income, but most investors, they go into equities and then they don’t realize how volatile they can be. And the risk when you think of successful portfolio construction, it’s not always about how much money you can make. It has to do with how much, you know, you’re protecting the downside risk as well.

Important information

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payment on time, and the bond prices will decline because of rising interest rates or negative perceptions of an issue’s ability to make payments.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

© 2017 The Vanguard Group, Inc. All rights reserved.