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May 03, 2013 at 09:23 AM
Retirees and others have been looking for income from a variety of sources in recent years, thanks historically low interest rates.
This has led investors to turn to higher-yielding fixed-income instruments like long-term government bonds or high-yield and junk bonds.
But what should they do when the current low-interest environment gives way to rising rates?
Advisor Nate Carlon (left) of Burnham Gibson Financial Group in Southern California—a group of nine advisors and about $750 million in assets that is affiliated with AXA Advisors—has a few tips to share.
The former vice president of investments with JPMorgan Chase’s wealth management operations says these five steps can help:
1. Understand Duration
Duration, Carlon explains, “is the price sensitivity of fixed-income instruments to changes in interest rates.” When interest rates move up, bond prices decline, and duration can serve as a guide in determining how fixed-income products will likely react to rising rates.
For instance, the expectation for a bond fund with a duration of 10 years is its price will drop by 10% if interest rates increase by 1%, he notes. (Bond prices and interest-rate shifts have an inverse relationship.)
2. Shorten Your Duration
To protect fixed-income instruments from rising rates, consider fixed-income funds that offer quality bonds with a range of less than five years, the advisor shares.
“While you may see a minor drop in expected yield by making this change, you have actually implemented a strategy to help protect the bond prices from significant price fluctuations,” Carlon said.
3. Bond Fund Mandates
Many investors don’t pay attention to the mandates and objectives of a bond fund.
