7 years Ago, MarcWites
Financial advisors often recommend that investors who want to minimize risk should place a significant amount of their investments in bonds and bond portfolios. The argument has been that bonds, with fixed percentages of returns, provide certainty and predictability. As a result, some people have invested in bonds and bond funds despite the relatively low interest rates associated with them in recent years.
Recently, however, experts and, now, the Financial Industry Regulatory Authority (“FINRA”) have warned that bonds may carry significant risks when, as many economists predict, interest rates begin to rise. The reason is that, as interest rates rise, so will the interest rates payable in connection with future bonds being issued. And, naturally, the market for existing bonds with lower rates will fall.
As noted by FINRA in a recent Investor Alert, this may significantly impact the value of a current bond investment. A major factor in evaluating how much your bond investments will be affected by rising rates is the bond’s “longevity.” In this context, the “longevity” is the remaining life of the bond. The longer the remaining life of the bond, the more its value is likely to drop in response to rising interest rates.
The FINRA Investor Alert explains:
a bond fund with a 10-year duration will decrease in value by 10 percent if interest rates rise 1 percent. In contrast, if a fund’s duration is two years, then a similar 1-percent rise in interest rates will result in only a 2-percent decline in the bond fund’s value.
This is because the values of new, higher-rate bonds are more attractive to investors, decreasing the value of, and ability to find purchasers for, the lower-interest bonds.
Although a Federal Reserve spokesperson recently indicated that interest rates are unlikely to increase until unemployment drops below 6.5%, or inflation rises above 2.5%, the increasing signs of economic recovery suggest that the question with regard to a rise in interest rates is not “if” but “when.” When this happens, investors who thought their portfolios were comprised of conservative, safe bond investments, may suffer significant losses, explained Marc A. Wites of Wites Law Firm
Bonds and bond funds also carry other risks, such as inflation risk, call risk, default risk and other risk factors. FINRA offers a complete discussion of such factors on its website under Smart Bond Investing.
What should an investor do? Contact your investment advisor bond and bond fund investments.
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Marc: Congratulations on the School Board settlement! Glad you were about to get a good result for your clients. Having been your adversary early on in the case, I can say it was a long battle and the great result was due to your persistence and creative approach to the litigation. Well done!Josh Eggnatz
Attorneys often convey a sterile attitude toward clients that is often void of sincerity and compassion, and may even be condescending. Marc Wites has not lost his humanity!! Mr. Wites is an attorney that continues to stay abreast of the law, which results in excellent results for his clients. Marc Wites is my “go to” attorney when I am looking for A-rated service and quality representation. I consider Marc as not only my attorney but a friend as well.David
An impressive chamber of knowledgeable attorneys/staff that stand ready to work tirelessly on behalf of their clients. Marc Wites is the quintessential Perry Mason advocate–erudite, prepared, and brilliant. He is ready to take on any legal challenge. Above all, he is understanding of the working class. Surely, he’s not just in it for the money; he genuinely wants to help people. Overall outstanding law firm.Raymond Brown
Mr. Wites accepted my case when other lawyers would not. He never promised what he couldn’t deliver. He was realistic, upfront and honest. He actually returns phone calls. And he is willing to explain the legal process and to take time to answer questions. I would definitely contact Mr. Wites if I ever needed a lawyer again.Karla