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Dave Olson, Published July 19 2013

Gold is down, interest rates are up, what's an investor to do?

Moorhead - When the stock market recently experienced broad swings in response to talk about rising interest rates and the negative effect that could have on bond prices, many investors considered redrawing their investment picture.

The impulse is understandable, said Jon Simmons, a financial adviser with Edward Jones in Moorhead.

“People haven’t experienced a rising interest rate environment in 30 years,” he said.

The value of bonds can be affected “significantly” by higher interest rates, Simmons said.

“So, we are reaffirming with people that they are long-term investors, trying to put a dollar figure on what their account might look like if rates continue to rise,” he said.

Where appropriate, “we have been shortening up their positions, making sure they’re not exposed to really long-term bonds.”

Simmons said that might mean moving some clients into shorter-term bonds.

Staying balanced

Just as important is reviewing a client’s overall portfolio to make sure they have a good blend of investments, he said, something he said is good to do no matter what happens with the markets.

“We are firm believers that having a balanced approach – at any life stage – is probably appropriate,” Simmons said.

He said having a balanced mix means that when one type of investment – stocks, bonds or something else – experiences a major change, the investor’s portfolio may only need minor tweaking.

“You’d be surprised how many people walk in with a bunch of statements and they have all their money in one thing,” Simmons said. “I tell my clients, if there is ever a point where they are completely happy with everything in their portfolio, they’re probably not balanced.”

Simmons said even a drop in bond prices may not signal a need to sell a portfolio’s bond holdings, especially if the investments were chosen carefully and the income they provide remains adequate for an investor’s needs.

He uses analogies to help clients understand the role bonds play in their portfolio. In one, he likens owning bonds to owning farmland that is rented out for income.

“You don’t really care what the value of your land is if you’re just going to keep collecting the rent,” Simmons said.

“The value of that land could go up one day and down the next and you really shouldn’t bother yourself with that, as long as you own quality land and the idea is to rent it for the long term,” he said.

Put simply, a $10,000 bond that pays 5 percent interest will pay $500 a year, he said. And it will pay that $500 a year whether the price of the bond drops to $9,000, or $8,000, or $2,000.

He said holding a bond until its maturity date takes the worry out of fluctuations in bond prices.

“If you buy a $10,000 bond and you hold it to maturity, they have to give you $10,000,” he said.

Income options

Simmons said many investors have turned to dividend-paying stocks as worry grows over uncertain bond prices, which he said can be a good option.

“There are companies out there who have had dividends for 50 years and raised them every year for 50 years in a row,” he said, stressing once more the importance of spreading one’s wealth among a variety of quality investments and refraining as much as possible from reacting rashly to market ups and downs.

He said many clients who stuck with that philosophy through the economic downturn five years ago did just fine. And because they did, they don’t call in a panic every time the market starts to look shaky, or if they hear interest rates may rise.

Now if clients call, they’re usually looking to buy, not sell.

“When we had the market pull back recently because of the rising rates, about five out of six (calls) were from clients looking to put money to work,” he said.

“They are at the place where they are looking for opportunities in both the bond and equity markets,” Simmons said, adding that rising interest rates may put a fresh shine on certificates of deposit and money market accounts, making them attractive places to look for income.

In the meantime, Simmons continues to tell clients what he always tells them: “Stay invested, stay with quality, stay with things you understand and you’ll be OK.”

Readers can reach Forum reporter

Dave Olson at (701) 241-5555