Chris Carter
Province
I know I should be allocating a greater portion of my investments to fixed-income securities like bonds, but I’m worried about interest rates rising after I’ve locked in my funds. Is there any way a regular investor like me can insulate his or her portfolio against rising rates, like a portfolio manager would?
— Todd, Kelowna
Dear Todd,
In some instances, investment-fund managers will hedge the risk of rising interest rates by buying sophisticated derivative contracts such as options and futures. If rates move higher, the derivatives would increase in value, offsetting any declines in the long-term bond prices.
Unfortunately, these derivative-type investments can be expensive and, in the hands of an unsophisticated investor, might just as likely cause more harm than good when it comes to improving your portfolio returns.
A more practical approach that any investor can take is to invest in several different bonds of varying maturities, selecting bonds with staggered, or “laddered,” maturities — that is, spacing your bonds to mature every two or three years.
You ensure liquidity by always owning a bond nearing its maturity. And by diversifying your investments between short-, medium- and longer-term holdings, your portfolio value stands to fluctuate much less, even during volatile swings in the bond market. If rates rise persistently, you can reinvest each bond as it matures at a new and improved rate of return.
© The Vancouver Province 2005
