Not long ago, the Federal Reserve announced that it would keep short-term interest rates near zero until late 2014. What effect will a prolonged period of low rates have on you, as an investor?
If you need income from your investments, you may have to look beyond short-term fixed-income vehicles, which may not keep up with inflation.
For starters, you may want to build a “ladder” of bonds of varying maturities. Then, if market interest rates are low, you'll still have your long-term bonds earning higher rates, but if rates rise, you can take advantage of them by reinvesting the proceeds of your maturing short-term bonds.
You might also consider dividend-paying stocks as an income source. In 2012, companies are on track to pay out a record amount of dividends, according to data compiled by Standard & Poor’s. Be aware, though, that these same companies can cut or eliminate dividends at any time.
Work with your financial advisor to help ensure low rates won't affect your income needs.
Don't Fret over Changing Bond Prices
If you own bonds, you know that their value will fluctuate. But should you care? Maybe not. After all, your interest payments will continue at the exact same level for as long as you own your bond, except in the rare case of default. So, if you hold your bond until maturity, you don't have to worry about fluctuating market interest rates, which are the chief cause of the rise and fall of bond prices. Another way to protect yourself from price changes is to build a “ladder” of bonds of varying maturities. Then, if market interest rates rise, you can sell your maturing short-term bonds and purchase new ones at the higher rates. And if market rates fall, you'll still have your higher-paying, longer-term bonds working for you.
One final word: Whether you own your bonds until maturity or build a bond ladder, make sure the bonds are appropriate for your needs and risk tolerance.
Contact Wendell at Edward Jones www.edwardjones.com.