For many, the plan to mitigate this “interest-rate risk” consists of simply avoiding the urge to sell bonds on the secondary market at a loss. But Hagensen says that’s often nothing more than “jumping out of the frying pan and into fire.” Historically, your money has to double every 20 to 25 years to simply keep up with inflation, he says. Therefore, you will likely find yourself disappointed by the purchasing power of your original bond investment when the principal is finally returned at maturity.
Related: The Name is Bond, Long Bond
Avoid long-term CDs
This should be intuitive. “If inflation is occurring and interest rates are rising, then there’s little logic in ‘locking up’ your savings at lower rates than what you suspect will soon be available,” Hagensen says. If you are adamant about owning CDs in a rising-interest-rate environment, a laddering approach may be prudent. Even so, he advises staying short-term with maturity dates.
Related: CBO Budget Projections Worsen at an Alarming Rate
Broadly diversify
If you have a long-time horizon, it’s likely your asset allocation consists of equities. “Inflation can have a relatively benign impact on your portfolio, assuming you maintain financial discipline during times of market fluctuations while possessing adequate cash reserves to cover short-term needs,” Hagensen says.
If you’re nearing or entering retirement and want a more predictable short-term approach, he says, it may still be prudent to diversify a portion of your portfolio into equities as a complement to your more stable asset categories.
“Regardless of what your personal situation is,” Hagensen says, “you can’t ignore the fact that inflation has the potential to upset your carefully arranged financial plans.”
This article has been republished with permission from Value Walk.