Investors fail to realize how rising rates kill bonds: report
If the results of the latest research are any indication, investors are in for a big shock once interest rates start rising and bond prices start falling.
In a survey of U.S. investors, investment firm Edward Jones found that two-thirds of the respondents don't understand how rising interest rates will affect their investment portfolios. Twenty-four per cent admitted they “feel completely in the dark about the potential effects.”
And it gets worse.
One-third of those between the ages of 18 and 34 admitted they have "no idea" how interest rate changes will impact their investments. While the level of awareness increased a bit with age, one-quarter of those 65 and older -- who typically gravitate to the income and perceived safety of bonds -- also indicated they had "no idea."
Bond yields have soared on the back of a big sell-off in the U.S. Treasury market this summer as markets price in a return to historical norms following years of low rates and excess liquidity created by the financial crisis.
Bond prices typically move inversely to interest rates. This means that as interest rates rise, the price, or value, of bonds will decrease since higher rates mean more attractive income for those purchasing new bonds.
But that doesn't mean you necessarily have to run for the hills, says Lawrence McDonald of brokerage Newedge USA. He says investors are likely getting the bond story all wrong. In fact, he boldly claims that rates aren't going to drop that much from here -- at least in the foreseeable future.
Bill Gross, the founder of Pimco -- the world's largest bond fund -- has been telling investors for awhile now that they must think differently about how to factor bonds into their overall investment mix.
And running away from bonds is not the answer, Gross maintains in his latest monthly newsletter. You just have to look for bonds that can play defense as interest rates rise.
Click here to read his argument.
What portion of your money is in bonds? Are you revamping your portfolio in anticipation of higher interest rates?
By Gordon Powers, MSN Money