More On Tax Planningfrom The Advisor's Professional Library
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
The financial services firm Edward Jones, which expects interest rates to rise over the long term, recently discovered that most American investors don’t understand how this will affect their portfolios.
In a survey of 1,009 adults conducted at the end of July on the firm’s behalf by Orc International, 63% of respondents said they didn’t know how rising interest rates would affect 401(k)s, IRAs and other savings platforms.
A full 24% said they felt completely in the dark about the potential effects.
The survey found that 32% respondents between ages 18 and 34 had “no idea” how interest rate changes would affect a portfolio. Respondents’ level of awareness increased with age except for the oldest age group. One-quarter of those 65 and older also said they had “no idea.”
Men and women are about evenly matched (40% and 39%, respectively) when it came to understanding there would be some effect on portfolios, without quite understanding the specifics.
However, a division occurred among those who admitted they “do not understand at all” what those effects might be. While 29% of women admitted they did not understand the issue, only 19% of their male counterparts did.
Respondents in the $35,000 income bracket were most likely to misunderstand the effect of rising rates, with 35% of respondents surveyed identifying as such. Just 13% of those with household incomes of $100,000 or more indicated the same.
“While it’s hard to know exactly where interest rates will go in the coming weeks and months, we believe over the long term that rates will continue to rise,” Tom Kersting, fixed income strategist at Edward Jones, said in a statement.
The firm noted in its statement that bond prices typically move inversely to interest rates. Higher interest rates mean higher current income for an investor purchasing new bonds.
For investors who already own a significant amount of fixed income, rising rates and corresponding falling bond values may mean lower overall portfolio value. Shorter-term bonds, while offering lower income opportunities, are less affected by the drop in bond value seen in longer-term investments.
“Fixed income is still an important part of an overall investment portfolio,” Kersting said, “but we want to remind investors that now is the time to consider buying shorter- and intermediate-term bonds, rather than just longer-term bonds.”
Check out What’s a Fixed Income Investor to Do? Try Alt Asset Classes on ThinkAdvisor.