Positioning your portfolio for changing interest rates
Throughout 2023, fixed-income investors who were brave and had excess liquidity were able to take advantage of opportunities that arose in the bond market. Investors were able to add instruments that were investment-grade at steep discounts. While some investors clutched their pearls, the brave stayed the course even as their portfolio value perhaps declined. The environment is slowly changing as the Federal Reserve narrative has shifted from rate hikes to potential rate cuts.
The actions of the FED will have some investors in a tizzy, but we advise people seeking fixed income not to have a knee-jerk reaction. The signals coming from the FED will have investors questioning how to position their portfolio for a lower interest environment. Investors should be cautious at this time; you do not need to do a full-scale revamp, but you may consider slight modifications to your portfolio.
Inevitably rates will go up and down, so the best advice is to monitor and rebalance as necessary. One strategy you may employ is by using a bond ladder. Review your current portfolio allocation and see what the timeline between your calls is and/or maturities. If you have staggered maturities when your bonds are called or mature you will receive your principal and have the ability to reallocate funds at different times under different market conditions. Shorter-dated bonds can provide an investor with more price stability, these fixed income instruments are a great way to maximise yield in the short term while producing a more moderate level of income. Holding your longer dated bonds or purchasing some now can produce higher income as you lock in higher rates based on the current environment.
The effect of the ladder is ideal because, as a fixed income investor, it will allow you to pivot and reallocate to suit you best. When laddering you will also consider the credit risk associated with each bond and you will also consider the price risk involved based on the interest rate environment.
A staggered portfolio will help the fixed income investor lock in yields, produce income, buffer in adverse conditions, and help keep overall balance in the investor’s portfolio. When assessing and considering modifying your portfolio it is always best to seek the assistance of a licensed financial advisor.
Christine Rankine is the manager – personal financial planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and ot
her hard currencies to the corporate, individual and institutional investor. Visit our website at
www.sterling.com.jm
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