Diverse funds best defense
NEW YORK — The prospect of higher interest rates has many on Wall Street wringing their hands, but most mutual fund investors should have few reasons to panic.
As long as your portfolio is well-diversified, financial planners say the best way to get through a series of rate hikes is to stick to your plan, and not try to time the market’s reaction to every move the Federal Reserve makes.
“If you try to time the Fed, you can’t just be right, you have to be more right than everyone else, including all of those institutional investors,” said Michael W. Boone, a financial planner in Bellevue, Wash. “If everyone already knows interest rates are going to go up, it doesn’t do any good to buy or sell on that news today.”
Concerns about higher rates took a chunk out of mutual fund returns over the past month as strong earnings failed to impress fearful investors and upbeat economic data fed their angst about higher rates. As worrisome as that might seem, however, it’s not a sign you should sell.
“My advice to people is to try to buy low and sell high,” Boone said. “I know it’s easy to say and sounds good if you say it fast, but the reality is the way you buy low and sell high is to stick with a mix that works with your goals and time horizon and don’t try to time the market.”
When investors are scared and risk-averse, bonds tend to go up and stocks go down. You can protect your gains and guard against losses by periodically rebalancing your portfolio, Boone said. For example, if your bond stake rises to a point that’s higher than your allocation calls for, you can sell some of it and buy stocks. Conversely, if your stock stake rallies upward, you can sell to maintain that allocation and buy some bonds.
Bond prices have gone up recently as traders speculate about how soon the Fed will raise short-term rates. The bond market’s broad consensus is that the Fed will raise rates by about three-quarters of a point by the end of the year. That, combined with an expected rise in inflation, has led many investors to take a hawkish view.
All of those expectations are “already baked in” to mutual funds, said Andrew Clark, senior research analyst at Lipper, so there’s probably little to be gained from trying to reposition your holdings ahead of the rate rise. If you’re contributing regularly to your investments — a strategy known as dollar-cost averaging — you should “keep it up,” he said.
If you hate the idea of doing nothing as the market slides into a frenzy over rates, there are some small things you could do at the margins of your account. For example, if you’re adding new money into your bond holdings, you might favor funds with shorter or intermediate maturities as opposed to long-term bonds.
“Often people don’t have a consciousness of what the maturity of their bond fund is,” said Susan L. Malley, chief investment officer for Malley Associates Capital Management. “When interest rates go up, bond prices go down, and generally speaking, the longer the maturity, the more the price will decline. So in a rising rate environment, one of the things you want to do is shorten up your maturity.”