Avoiding Bond Suicide

Is it any wonder that the concept of the "conservative investor" is evolving? Inflation, higher interest rates and a red-hot stock market, heading towards correction, are creating a new breed of conservative investor. "I remember the hyper-inflation of the early 80s," says Stuart Joseph, a broker friend of mine. "A bond selling at par, a $100 value, rapidly fell to $55." Today's conservative investor needs to keep in mind that bonds, just like stocks, have risks. Know, in particular, that the longer it takes a bond to mature, the more susceptible it is to interest rate changes. During a period of rising interest rates, I think it's important to consider:

1. Tweaking Asset Allocation -- Conservative investors need to decide for themselves if more stocks in asset allocation models, 2. Defending Bonds -- Bond duration, a method of measuring interest rate risk, helps predict how changes in interest rates affect bond prices. Investments with shorter maturities and durations are thought to reduce the impact of rising interest rates on bond prices, 3. Managing Fixed Income Portfolios -- Savvy investors often build bond ladders, with staggered or different maturity dates, to reduce interest rate risk, 4. Buying Dividend-Paying Stocks -- Many investors buy dividend paying blue-chip stocks, like GE or Exxon-Mobil, to reduce reliance on or complement fixed income investments. Stable dividend income, and, in good times, increases in stock price or dividends are perceived benefits.

Source: bradenton.com

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