Understanding Interest-Rate Risk
2 min readBrought to you by Sound Choices - AGF Education for Investors and Advisors
Investors usually look to fixed-income investments to provide a safer haven from equity market fluctuations. However, investors need to be aware of the risks associated with fixed-income investments, particularly interest-rate risk.
What some investors may not understand is that when interest rates rise, bond prices go down (and vice versa).
How active management can help
These uncertainties do not mean that all fixed-income investments are equally vulnerable to interest-rate risk. There are a number of ways that active fixed-income managers can minimize the impact of a rising interest-rate environment and still search out attractive opportunities.
For example, rising rates can have more of an impact on longer-duration bonds (i.e., bonds with a maturity of 10 or 20 years) than shorter-term bonds. Therefore, if expectations are that interest rates are going to rise, managers can invest in government or corporate bonds with shorter maturities (i.e., in the one- to five-year range).
To learn how you can diversify your fixed-income portfolio, talk to your financial advisor or read “The Turning Tides of Fixed Income”.
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This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. This information is not meant as tax or legal advice. Investors should consult a financial advisor and/or tax professional before making investment, financial and/or tax-related decisions.
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