These are very tough times for seniors. So many now in retirement are put in the impossible situation of rolling their CDs into new ones yielding so little it is hardly worth the effort. In an attempt to jump start the economy the Federal Reserve has put interest rates in the tank and indicated they will keep rates there for at least couple more years. What they are forgetting is seniors spend money on trips, eating out, outside services, you name it. When those folks see their CD income drop from 5% yield to 2% it is a real problem and they are unable to spend as they were. Business must be stimulated but the result may hurt more than help.
Many seniors are turning to bond funds, or even more dangerous below investment grade bond funds. All need to understand when interest rates start to rise, which they will eventually, their principal will drop lower to compensate. There is a formula for this. If you own a bond fund with a five year average duration and interest rates rise by 1% you can expect your principal to drop by 5%. In other words, if you invest $100,000 in a bond fund and rates go up 1% your investment should lose $5,000 in value. If rates go up 2% the same should hold true, a $10,000 hit. People need to understand this and I am not sure many do.
Obviously I am not an investment adviser so be sure to talk to your personal adviser before making any portfolio changes. Ask him or her to verify my claims. Invest with care and knowledge.
Ken Dillenburg