How rising interest rates will affect your portfolio

How rising interest rates will affect your portfolio

Quick note on a sale we’re having: You may have noticed that I recently opened a store at Intentional Retirement.  Almost everything I do at the site is free, but I do have a few things for sale (and several new products on the way).  To celebrate the opening, I’m having a sale on the current flagship product, the If Something Happens to Me Kit.  Thousands of people have purchased the kit over the years as a tool to fill holes in their planning and organize their financial, legal and insurance affairs.  Through Friday of next week (June 28), if you purchase the kit, I’ll throw in a free copy of my book The Bell Lap: The 8 Biggest Mistakes to Avoid as You Approach Retirement (normally $14).  A few questions you might have:

Q: If I buy multiple copies of the kit, do I get multiple free copies of the book?
A: Yep.  Buy some for friends and family.

Q: Can I forward this email to anyone I know who might be interested?
A: Absolutely.

Q: Will the free book show up in my order details when I place the order?
A: Nope, but it will be in the box when your order arrives

Q: What if I have some other question?
A: Just email me at or give me a call at 1-888-391-4344

And now a look at rising interest rates…

How rates got so low

In response to the global financial meltdown in 2007-2008, the Federal Reserve lowered short-term interest rates to historic lows in an effort to stimulate the economy.  When that didn’t seem like enough, they started a program of “Quantitative Easing” where they began buying bonds in an effort to lower rates further.

As you might imagine, when a buyer shows up and says “Give me a few trillion dollars of those” the price of “those” tends to rise (more demand = higher prices).   With bonds, when prices rise, rates fall.  So as the Fed artificially pushed up prices, rates fell further.  That was good news if you were borrowing money for a house.  Bad news if you were trying to earn a little interest on your money market or CDs.

Investors responded to the 2007-2008 crisis by shifting a disproportionate amount of their money from stocks to bonds.  Seeing your stock portfolio drop by half can go a long way toward making you a lover of all things fixed income.  With everyone buying bonds, prices rose further and rates fell further.  So that brings us to today, where rates are extremely low and most investors are overweight bonds.

What happens when rates rise (as they have started to do)?

Of course the Fed can’t keep printing money and using it to buy its own debt forever.  “Wouldn’t be prudent” as Bush 41 would say.  When the economy gets better, Bernanke has promised to take away the punch bowl.  When that happens, the biggest bond buyer in the market will put away its checkbook and those artificially high bond prices will start to fall.  As prices fall, rates will rise.  Said another way, all those bonds that people have bought over the last 5 years could start to lose money.

How can I protect myself?

Chairman Bernanke came out this week and said that the economy is looking healthy enough that the Fed will likely wind down its QE program by the middle of next year.  Right on cue, rates started to rise and bond prices fell.  So how can you protect yourself against rising rates?

First, review your asset allocation.  As I said earlier, many investors swore off stocks after 2007 and shifted most of their money to bonds.  That could expose them to significant losses if bond prices fall.  Look at your portfolio and see what percentage is in things like bonds, stocks and cash.  Work with a trusted adviser to make sure that the balance is appropriate for your circumstances and risk tolerance.

Second, review the duration of your bonds.  Not all bonds respond the same to rising and falling interest rates.  Duration measures how sensitive a bond is to a change in rates.  The higher the duration, the more sensitive the bond.  If a bond (or bond fund) has a duration of 10, it will typically fall in value by 10% if rates rise by 1%.  If it only has a duration of 3, it will fall by 3% if rates rise by 1%.  It stands to reason then, that if you expect rates to rise, you should gravitate toward lower duration bonds.

Third, don’t panic.  Markets tend to overreact.  Rather than focusing on the daily headlines, the best recipe for a good night’s sleep is to make sure that you have a well balanced, diversified portfolio that is appropriate for your circumstances and goals.

Any other questions about bonds?  Put them in the comments section below and I’ll do my best to answer them.  Have a great weekend!

~ Joe

Channeling my inner Bear Grylls

Channeling my inner Bear Grylls

Before today’s post, 2 quick reminders:

1)     Later on this morning we’re having a free Teleseminar on the ins and outs of long-term care insurance.  My guest will be one of the foremost experts on LTC in the country.  You’re all invited.  Find call in details here.

2)     If you missed Friday’s post, I just released a new eBook called A Brief Guide to Retirement Bliss.  You can download a free PDF here.  You can download the Kindle version here.

And now on to today’s post.

As many of you know, one of the tenets of our philosophy here at IR is that life is much more interesting if you’re always learning to do new things.  Toward that end, I do periodic learning challenges and then write about them here at the site.

We’re in the process of taking our daughter to all 50 states (33 to go!) and we plan on doing some camping when we make it to places like Wyoming, Montana and Utah.  To make sure we’re ready, I signed up for a six week class on camping and backpacking at the local university.

The course covered things like how to pack and dress, how to cook in the backcountry, using a map and compass, backcountry first aid, trip planning and leave no trace camping.

After finishing the class, I wanted to test out my newly acquired skills, so I bought/borrowed/rented some gear and we planned a three day camping and backpacking trip to Kansas (aka state # 18).  I’ll let you know how the test run goes.

Interested in doing a similar challenge?

If camping sounds like something that might interest you, here are a few ideas to get you started:

  • Sign up for classes at your local university or outdoor store
  • Subscribe to Backpacker magazine.  I’m not super outdoorsy, but this magazine is awesome.  Lots of “how to” and inspiration.
  • Get some gear.  REI is a great place start.  I bought their Half Dome 4 tent a few weeks ago when it was on sale.  If you want to take a few trips before investing in gear, you can probably find a place to rent most of what you need.  Again, the local university where I live has an Outdoor Venture Center that rents gear to students, but they also make it available to the general public.  Ask around for something similar in your area.
  • Plan a trip!  The point of these learning challenges is to take what we learn and put it into practice by doing fun and interesting things.  Once you learn some camping and backpacking basics, plan a trip and get out there and enjoy the outdoors.  A good place to start would be one of the 59 National Parks in the U.S.  Visit to learn more.
  • While we’re on the topic of National Parks, watch The National Parks: America’s Best Idea by Ken Burns.  We just finished watching the entire series with our daughter.  It’s available for “instant streaming” on Netflix.

What’s next?

I enjoy photography and I’m always looking to sharpen my skills in that area.  A friend of mine recently introduced me to someone who is an expert in time-lapse photography.  I asked him if he’d teach me how to do it and he graciously agreed.  I’ll update you next month to let you know how it goes.  By the way, if you’re not familiar with time-lapse, here’s a great example of it on vimeo.

Have a great week.

~ Joe

A Brief Guide to Retirement Bliss

A Brief Guide to Retirement Bliss

If you’ve spent any time here at IR, you know that I have a bit of a different take on retirement than most.  Where others see something based on age or assets, I see something based on control.  Where others see a life stage, I see a lifestyle philosophy.

After all, why should living the life you truly want to live depend on how many birthdays you’ve had or whether or not you punch a time clock?  How in the world has it become acceptable to defer your dreams and push the best things in life to the very end?

I think there’s a better way and I’ve outlined it in my new ebook A Brief Guide to Retirement Bliss.  Consider it the Intentional Retirement Manifesto.  In it you’ll learn how to:

  • Reimagine retirement
  • Stop deferring your dreams
  • Live the life you’ve always wanted

Sound good?  Just click the cover image below to download your free copy (PDF Format) or visit the download page at

I encourage you to read it and share it with others, but most of all, I encourage you to use the principles outlined in the book to create a remarkable retirement.  And after reading the eBook, feel free to check out our Retirement Toolkit for more free resources.  Enjoy!

~ Joe