USA TODAY US Edition
Moves you can make now to protect your retirement
Investors around the world are closely watching the U.S. Federal Reserve in advance of its highly anticipated policy meeting Wednesday and Thursday.
But regardless of whether the Fed starts raising key rates in September or at a later date, one thing is clear: Investors are preparing for an environment of increased rates.
“Interest rates are near historical lows and can only move long term in one direction — and that is up,” said Robert Johnson, president and CEO of the American College of Financial Services.
So what moves should you make to protect your retirement funds? BOND MOVES The biggest area to focus on, Johnson said, is bonds. There is an inverse relationship between bond yields and underlying bond values, because new bonds reflecting these higher rates are in demand, and the older bonds with lower payouts become less attractive.
To protect your portfolio, Johnson advises looking at shorter duration bonds — those that mature in one to three years instead of 10 to 20. Yields aren’t as high in shorter-term bonds, of course, but the risk of losing value is significantly lower because they mature faster.
“Protecting principal is particularly important for those ... nearing retirement,” he added.
Of course, if you’re nowhere near retirement age there may not be any reason to have any bond exposure at all right now.
Those with patience and time on their side should consider putting 100% of their portfolio in stocks, said Denny Baish, a senior investment analyst at Fort Pitt Capital Group in Pittsburgh. “Younger investors will have plenty of time to ride out the ups and downs.”
And even if you don’t feel comfortable with an all-stock portfolio, Baish added, bond investors still should consider a “tilt” toward stocks right now. STOCK MOVES A few flavors of companies stand out as unique opportunities or pitfalls in times of rising rates.
“More cyclical sectors of the market do well in a rising-rate environment, one of those being financials and, regional banks in particular,” said Dave Mazza, head of research for the SPDR family of exchange-traded funds at State Street Global Advisors.
That’s because a healthier U.S. economy is necessary to support higher interest rates, he said, so lending, consumer spending and household formation should all stay strong in the coming years.
At the same time, Mazza warns that investments such as utility stocks and consumer staples may fall out of favor.
“The move out of these assets could be violent” if the Federal Reserve starts to steadily raise rates.
Another area of concern is smaller companies, which are not as well capitalized as the big-name corporations and thus will be hurt by increased borrowing costs under a higher interest-rate environment.
“Don’t expect much from small firms,” Johnson said, and consider moving some of your money into bigger stocks if interest rates start rising.