With interest rates still at historically low levels and the economy picking up steam, the Fed has started to raise interest rates. The question now is by how much and how quickly the Fed will increase interest rates. The answer is especially pertinent to bond investors who will find their bond values decreasing as interest rates increase. But don't totally abandon bonds just because their values may decrease in the near term. There are still valid reasons to hold bonds in your portfolio:

• Bonds add diversification to your portfolio. Many investors added bonds to their portfolios in the aftermath of the recent stock market declines. However, all investments move in cycles, with bonds now poised to decrease in value when interest rates increase. The whole point of diversification is to hold a mix of investments so when one investment type is declining, other investments will help offset those declines. Historically, stocks and bonds have a low positive correlation with each other.
• Bonds offer fixed, periodic interest payments and your principal's return at maturity. Thus, even if current bond values decline, you receive some return in the form of interest payments and the return of your entire principal at maturity.
• Bonds are often better suited for short- and medium-term financial goals. If you need your money in the next few years, you may not want to keep those funds invested in stocks, since a major stock decline could occur when you need the money.

Rather than selling all your bonds, look for strategies to use in a rising interest rate environment. Some strategies to consider include:

• Use a bond ladder. A bond ladder is a portfolio of bonds of similar amounts maturing in several different years. When one of the bonds matures, the principal is reinvested in another bond at the bond ladder's longest maturity. By spreading out maturity dates, you lessen the impact of interest rate changes. Holding the bond until maturity prevents interest rate changes from resulting in a loss when you sell the bond. Since your bonds mature every year or so, your principal is reinvested over a period of time instead of in one lump sum. If interest rates rise, you have principal maturing every year or so to reinvest at higher rates. In a declining interest rate environment, you have some funds in longer-term bonds with higher interest rates. But the main advantage is you don't continue to hold only short-term bonds while you wait for interest rates to peak, an event that is difficult to predict.
• Consider a bond swap. A bond swap is simply the sale of one bond and the purchase of another. A rate anticipation swap is made to take advantage of changes in market interest rates. It typically involves swapping short- for long-term bonds or vice versa, depending on your beliefs about the future direction of interest rates. When you anticipate interest rates might increase, you might swap out of longer-term bonds into short-term bonds. Then, when interest rates do increase, you will have funds available to invest at the higher rates. Before executing a rate anticipation swap, make sure you understand all costs that will be incurred and whether the sale of your existing bond will result in a taxable gain or loss.
• Invest in short- or intermediate-term bonds. When interest rates rise, bond values decrease the most for long-term bonds, since they have a long stream of interest payments that do not match current interest rates. Thus, for new bond purchases, you may want to shorten your maturity dates in the near term until rates stabilize at higher levels.
• Compare all types of bonds before investing. If you have a bond maturing, don't just reinvest in the same type of bond without taking a look at other alternatives. For example, lately the spread between corporate and municipal bonds is very small, making municipal bonds an attractive alternative for investors in higher tax brackets.

Commitment to his clients’ financial needs and well being is a primary motivation for David.

The Physicians Wealth Management Group was specifically created to address and manage all of the unique financial challenges that doctors are facing both individually and through their group medical practices.

Feel free to contact me at
www.physicianswealth.com or
dsebastian@sfr1.com
or call me at (973) 285-3600