This week, I’m talking about how the interest rate decisions by the Fed to raise or lower interest rates impact your retirement portfolio.
Yesterday, I talked about a damaging mistake that investors often make when interest rates drop - reaching for yield by trading in shorter-term bonds with longer-term bonds.
Today, I’m sharing with you the other costly mistake that I see investors fall victim to in their bond portfolio when interest rates drop - searching for more income and more yield in lower quality bonds.
With rates today, a bond portfolio yield of 3% is good. However, investors often get lured into trading their higher quality bonds for lower quality bonds in order to earn 5, 6, or 7%. While this higher yield sounds great on the surface, trading in your higher quality investment-grade bonds for junk bonds as they are commonly known introduces a variety of risks.
Namely, the default risk on lower quality bonds is much higher. When a company defaults on it’s debt, guess what? You don’t get paid that 6 or 7% interest anymore. And good luck getting your money back too. More often than not in a default situation, you lose the money you originally invested, in addition to the stopping of interest payments.
So it’s important to exercise caution when investing in lower quality junk bonds with a higher rate of default. We tend to stay away from these types of bonds since they are so unpredictable and the risk just isn’t worth it for us to invest our client’s money, even if the yield is higher.
That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip.
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