Why Owning Bonds As Rates Rise is Actually Ok

Maura Schauss |

Todd Youngdahl, CFP®  at Washington Wealth Advisors

What impact would rising interest rates have on your investment portfolio? Likely not as bad as the media might lead you to believe.

Forecasts and Predictions, A Look Back

Interest rate hikes has been widely anticipated for quite some time. In fact, according to a recent survey of top economists that the Wall Street Journal conducted, the yield on the 10-year Treasury was predicted to rise nearly one percentage point by the end of 2022 to about 5.00%.

But we don’t have to look that far into the past to find the historical inaccuracy of such forecasts. For instance, a similar survey conducted in 2010 had economists predicting a 4.20% 10-year Treasury yield by the end of the year, an increase from 3.61% at the time of the forecast. In actuality, rates declined to 3.30% at year-end.

The inaccuracy of these forecasts is well documented. In fact, a study by North Carolina State professors titled “Professional Forecasts of Interest Rates and Exchange Rates” found economists predict future rates far less accurately than a random coin flip fares as a predictor.

Clearly, we can’t be confident exactly what interest rates will do in 2022 or 2023 – and while predictions of rising rates will likely come true – predicting the extent to which they rise is as difficult as predicting future stock market levels.

Bonds as a Diversifier to Equities

One key point that investors should remember, however, is that bond yields move in the opposite direction of prices. So while the prices might fall, higher yields can often offset that. In addition, investors should never forget the value bonds add to a portfolio as a diversifier to stocks – because frequently the performance of stocks and bonds are inversely related.

Why Keeping with Bonds Might Make Sense

Depending on your goals, generally speaking it doesn’t seem prudent to avoid bonds entirely during periods of expected interest rate increases.

  • First, precise forecasts of rising rates are far from certain.
  • Second, even as interest rates rise, bonds are still likely to be far less risky than stocks.
  • Third, rising interest rates don’t necessarily mean declining bond values are a certainty,

Finally, bonds are a vitally important part of a diversified portfolio, and owning uncorrelated and negatively correlated assets is critical when equities ultimately lose their luster.

How Washington Wealth Advisors Can Help

If you are interested in learning more about a bond strategy as a part of your overall financial plan, we would welcome a conversation to see what may be the right approach for you and your unique goals. Washington Wealth Advisors can support you and the achievement of your unique goals. To learn more, call our office at 703.584.2700, email  clientservices@washingtonwealthadv.com, or schedule a meeting with us.

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ABOUT WASHINGTON WEALTH ADVISORS

Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our fiduciary approach, independent advice, and proactive investment management help to support our clients’ overall financial peace of mind.

Source: Financial Media Exchange