• Editor's Note
  • Editor's Note

    by Charles Rotblut, CFA

    Many AAII members have expressed their concerns to me about what could happen to interest rates in the future. Though every prediction made since the 2008 financial crisis about when the Federal Reserve will raise rates has been premature, sooner or later interest rates will rise. We simply do not know when or by how much.

    Since the uncertainty of interest rates is a concern, I’m including two articles discussing what to do with bonds and bond funds. They appear here and here.

    The first is by Craig Israelsen. Craig is an associate professor at Brigham Young University. Craig looked at the historical data to see how bonds performed during the last extended period of rising interest rates, 1948 through 1981. What he found was that bonds had an annualized gain—yes, a gain—of 3.83%. More importantly, he further found that having a properly diversified portfolio mattered more than the direction of interest rates.

    The second article is by Stan Richelson and Hildy Richelson. They point out that though bond prices do fluctuate on a daily basis, the price fluctuations shouldn’t matter to an investor intent on holding a bond to maturity. The rationale is that when held to maturity, a bond provides a known return. Stan and Hildy further argue that the cash flows from a bond ladder can be reinvested at higher yields should interest rates rise in the future.

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    Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


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