One of the great advantages of being a long-term investor is the luxury of checking out of the daily financial news cycle. Diversification and a long time horizon silences much of the noise. But, whether or not an individual can actually ignore the news cycle and short-term market changes and not react to them is another story. When the news implies that you should be concerned, it’s hard to stay calm.
At the end of 2015, the Federal Reserve began raising the federal funds rate and the increases have continued this year. These policy decisions are exactly the type of short-term change that long-term investors shouldn’t worry about. But it’s hard when news suggests otherwise—as NPR’s Marketplace reminded me the other day on my drive to work. The story, as with any story discussing a change to interest rates, is obligated to remind the listener that a bond’s price moves inversely with interest rates. In other words, as Interest rates rise, bond prices fall. The visualization looks like this:
It’s that visualization that understandably causes clients to reach out and say, “I heard that interest rates are rising, should I be concerned? Should we be getting out of US Bonds?”
It’s with this concern in mind, that I want to explain first, why rising rates should not be scary; and second, explain why you may even want to look at it as a good thing.