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5 Ways to Benefit from Rising Interest Rates

After the most recent interest rate increase in June, the Federal Reserve has signaled that it is likely to continue raising interest rates this year, possibly even as often as once per quarter. In fact, fear that interest rates may rise faster than previously predicted has caused some volatility in the markets. Bond investors have been concerned about this for years, but this time it looks like it’s going to happen. Warren Buffet said, in his latest shareholder letter, that “Often, high-grade bonds in an investment portfolio increase its risk.” That can be true, but then, we don’t all have Warren Buffet’s net worth to fall back on!

That may have you wondering – how can I take advantage of rising interest rates? And, generally speaking, bond yields go down as interest rates increase.

But remember, while bonds may decline in value, their moves tend to be smaller compared to other securities. Many investors are flooding into U.S. Treasury bonds, making the so-called flight to quality, because right now, the U.S. looks better than other economies worldwide. This means that medium and longer-term bonds – whose rates are often more influenced by investor expectations than anything else – are likely to be most affected. But, there are many strategies you can use to manage your bond portfolio in a rising interest rate environment.

  • For Treasury inflation-protected securities, or TIPS, the Treasury Department uses the Consumer Price Index to adjust the principal for inflation (or deflation) twice a year. At maturity, the investor gets either the inflation-adjusted principal or the original principal, whichever is higher. They can be a great way to capitalize on rising interest rates.
  • Another smart strategy is to invest in single corporate bonds. You can structure this based on income needs, and then you’re never forced to sell, and can simply hold them to maturity. And keep in mind you don’t want junk bonds – you want quality – bonds that have an AAA or AA rating according to Moody, or Standard and Poor.
  • A third smart strategy is buying single municipal bonds, which are often “triple-tax free” – they sometimes avoid local, state, and federal taxes.  
  • A final strategy is a bond ladder. A bond ladder is a structure where you own individual bonds with, as an example, 20% percent of the bonds that mature in two years, 20% percent that mature in 3 years, 20% in 4, 20% in 5, and 20% in 6.

The idea is that in each year, as 20% percent of the bond ladder matures, this amount is reinvested in a new five-year bond. If rates have increased, the yield on that "new" four-year bond is likely to be much higher than the four-year bond that was purchased just one year ago. These ladders can bring balance and discipline to a bond portfolio, and it doesn’t require timing the interest-rate environment. As long as rates increase over time, which they look likely to do, a bond ladder ensures there is regularly available capital to reinvest at higher rates.

Keep in mind that these strategies all apply to purchasing single bonds. But, if you prefer bond funds, you have some strategies there as well. First, look for what we call an unconstrained fund manager. That means that they can invest in domestic and international bond funds. Remember, while interest rates may be rising in the U.S., that isn’t the case in many other countries, and they may have environments that make bonds attractive.

If you have questions about your bonds, or other strategies to benefit from rising interest rates, we’re here to help! We offer a free, no-obligation consultation. You can schedule your appointment today by calling us at 216.521.1711, emailing us at Quarterback@Lineweaver.net, or by clicking here.

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Posted By Lineweaver Financial Group
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  Financial markets are off to a challenging start this year as high inflation and rising interest rates have impacted both the stock and bond market. But at a time when news headlines and investors appear focused on the negative outcomes, we’re here to discuss some proactive moves investors can make to combat market volatility.   This year’s decline in both stocks and bonds has been painful for passive investors. Year-to-date a traditional portfolio of 60% stocks and 40% bonds has declined more than 10%, which is on pace for its worst year since 2008.   However, with the right professional financial advice, investors can be making proactive portfolio adjustments to better suit the current market environment.   Some of these adjustments might include implementing positions that benefit from higher inflation, shifting equity exposure from previous leadership to areas of the market that are emerging as winners in this new environment, and focusing on dividend stocks and higher yielding bonds.   Within equities, for over a decade, investors have been able to rely on growth areas of the stock market for leading market returns, however, now these areas such as consumer discretionary and technology are showing early signs of a possibly dimming return outlook.   While those areas may be challenged, prospects for other areas of the market appear to be brightening. These include areas such as the natural resource/energy sector

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Posted By Lineweaver Financial Group
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Student loans are a great investment when continuing your education so it’s important to know the different kinds that are available and the strategies for dealing with them. According to data from Lendingtree.com, more than 2/3rds of graduates – from both public and private institutions – have student loans and it’s something that affects many Americans. For parents and grandparents of current college students, there are a few different kinds of student loans to understand. These fall into four categories: Subsidized, Unsubsidized, PLUS loans, and private loans. When it comes to Federal loans, there are essentially three kinds. Subsidized are only applicable to undergraduates with demonstrated financial need. Unsubsidized loans are not tied to financial need, and are available to all undergraduate, graduate, and professional students. PLUS loans are available for graduate and professional students, as well as the parents of dependent undergrads. Subsidized and unsubsidized federal student loans don’t require a credit check, and you are able to secure them simply by signing a form indicating that you will pay them back. However, PLUS loans and private loans will require a credit check. Private loans come from banks and other financial institutions who lend directly to students and their families.  These are similar to any private loans, in that they’ll require a credit check, and the lender will want to see proof that you are

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