Q&A: Whither Rates?


I'm 60 years old with a portfolio of 65% stocks and 35% bonds.( $400,000 in intermediate term bonds.) My Fidelity broker is anticipating an interest rate hike in September. He wants me to sell $150,000 of the bonds and move to cash. Should I make a move?


Let’s start with the premise that an obscure stockbroker can have a more valuable opinion about the direction of interest rates than tens of thousands of financial “experts” around the world. On what is his opinion based? More likely than not, it comes from watching CNBC or reading the popular money media. It’s a pretty common opinion since many mutual fund managers have been betting on falling interest rates (and losing) for the past three years. 

After falling for decades, interest rates will probably rise one day. Does your stockbroker know exactly when that will happen and how far they will rise? The obvious answer is no because the future is inherently unpredictable.

You could get out of your bonds and go into a money market account in which you are almost guaranteed to lose to inflation. When will you get back in? What if rates stay low for another three years? What if they rise quickly and then start falling again before you repurchase?

Your portfolio needs to be constructed for your risk tolerance. Your bond position should be designed for relative safety using short and intermediate U.S. government bond funds. When rates eventually rise, older bonds in your mutual funds will mature, and those dollars reinvested in new higher yielding bonds. In effect, shorter maturity bond funds self-correct for changes in the interest rate environment.

The bottom line; don’t move your money unless it’s as part of a process to create the right overall portfolio for your needs and risk profile.

Don McDonaldComment