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How Rising Interest Rates Will Affect You

September 2nd, 2013

interest rates bonds 600X300: According to a survey, 63% of investors don’t know how rising interest rates will affect their portfolios. They should, because rates are climbing fast. The 10-year Treasury is at nearly 3%. Just three months ago, it was under 2%. The 10-year Treasury yield can affect mortgage rates, interest rates on credit cards… and especially your portfolio.

If you’re one of the 63%, let me explain what continued rising interest rates will mean to you.

You will lose money in bond funds. Bond funds own bonds in their portfolios. When interest rates rise, bond prices fall because the lower-rate bonds are less valuable.

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Think about it. Suppose you bought a 10-year bond paying 2% a few months ago. And today the 10-year bond yields 3%. If you wanted to sell your bond, you would have to sell it at a discount. No one would pay the same amount you did for a bond that yields less than what can be obtained in the open market.

So bond prices fall when rates go up. As a result, bond fund prices fall as well because the value of the bonds they own goes down.

The problem is that unless yields fall again back to all-time lows, the bond fund prices will not recover. Even if you’re a long-term investor, you’ll lose money. You’ll continue to receive income from the funds, but chances are that when you sell the fund, you will receive less money than you paid for it.

If you insist on staying in bond funds, be sure they’re short-term. The shorter time to maturity, the less the damage will be.

You don’t have to lose money on individual bonds. If you own individual bonds – whether they’re investment-grade corporates, junk bonds, munis or Treasurys – hang on to

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