GOLDEN VALLEY, Minn. - If you have a 401(k) account and maintain exposure in bonds, you may or may not be fully aware of the potential negative effect on those investments when interest rates go higher.
Understanding your options now may behoove you before the situation occurs. Dan Ament, Financial Advisor with Morgan Stanley in Wayzata, shared some perspective on KARE 11 Sunrise.
Assess your portfolio - A common component found within a well-diversified portfolio are bonds; especially for those investors who are approaching retirement or already retired. Bonds come in many varieties and flavors, too many to elaborate here. That said, if you hold bond funds within your 401(k), it would be wise to understand what type of exposure you have if or when rates move higher. Understanding this as well as available alternatives within your 401(k) options will allow you to better maneuver your portfolio in the future.
Interest rates up, bonds down - Generally speaking, when interest rates move up, bond prices move down. While the degree of sensitivity depends on a variety of factors, it is important for bond investors to understand this relationship and the potential impact on their fixed income exposure. A general guide to determine potential impact? Amount of increase in interest rate x the duration of your bond portfolio. For example, if rates rose by 2% and the duration of your portfolio was approximately 5 years, you would expect to see the potential for a 10% decline in the value of the bond portfolio.
Stable value funds in 401(k)s - Stable-value accounts are available in half of all defined-contribution retirement plans, according to the industry's Stable Value Investment Association. At the end of March, the average stable-value yield was 2%, according to an index compiled by Hueler Cos., a Minneapolis research firm. Stable-value accounts are designed to have a steady value on which you earn interest. About 44% of the dollars in stable-value accounts are invested in traditional guaranteed investment contracts, or GICs, issued by insurance companies, according to the industry association. While stable-value accounts are intended to minimize investors' risks, they aren't risk-free.
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