The Fixed Income and Rising Rates Dilemma

There may be risks involved with having a large fixed-income position given the prospect of higher interest rates

Christine Benz 30 March, 2012 | 3:21PM

Question:
As a 68-year-old new retiree, I have about half of my portfolio in bond funds. But frankly, I'm questioning the wisdom of such a large fixed-income position given the prospect of higher interest rates. What should I do?

Answer:
Your question is a timely one. Investors, especially those in or nearing retirement, are rightly concerned about how the so-called safe portions of their portfolios are likely to behave in a sustained period of rising interest rates.

It's definitely smart to think about what risks might lurk in your portfolio, particularly in segments that you expect to be drawing upon for living expenses within the next several years. And it's also true that after a few decades' worth of declining interest rates, rates have much more room to go up than they do to go down further. That could spell trouble for bond prices if rates head up and continue to spike.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.

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