The Risk of Rising Interest Rates

Let’s take a moment and look at what interest rates have done over the past several decades. Starting back in 1950, and going all the way to 1982, the yield on the 10-year US Treasury bond rose from 2.32% to a staggering 14.59%. Then, between 1982 and the end of 2012, the whole thing reversed course, and the 10-year fell all the way down to 1.9%. Wow… That’s a huge swing.

Here’s the thing… If you’re a bond holder, a change in interest rates means that the value of those bonds you’re holding could also change. As interest rates rise, the value of your bonds in the secondary market goes down. And right now, though interest rates are still at historically low levels, we could be seeing higher rates in the near future. So here’s the key question: which scenario might make more sense for you, keeping your bonds, or potentially improve your risk-adjusted performance with some fixed-income alternatives?

Last year, Wade Dokken and Jack Marrion did some research to answer this question and published the results in Financial Advisor Magazine. They took portfolios with different combinations of stocks, bonds and fixed-index annuities and measured their performance to determine the various risk-adjusted returns.

What they found was that with the addition of fixed annuities to their portfolios, investors looking to potentially avoid losses in the years just prior to retirement, or during retirement, may be able to reduce the overall risk in their portfolio and which may also optimize its performance. They looked at different periods of bear and bull markets for bonds. In every instance, they discovered that adding fixed-index annuities helped a portfolio’s risk-adjusted performance during periods of time that saw both rising and falling interest rates.

This is really important, because a rising interest rate environment can cause significant losses for investors who sell their bonds before they mature. We all know that it’s impossible to accurately predict the direction of interest rates. But it’s vital to be prepared for whatever might happen. Keep in mind that not all index annuities are created equal – they’re complex instruments that can be confusing.

To find out more about how adding a fixed index annuity to your portfolio may provide you with some protection against interest rate risk, just give us a call at Lucia Capital Group. We’re here to help.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. 

It is important to keep in mind that investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. Interest may be subject to the alternative minimum tax. Treasury securities are backed by full faith and credit of the U. S. Government but are subject to inflation risk. 

No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional. 

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker/dealer, Lucia Securities, LLC, member FINRA/SIPC. Registration with the SEC does not imply a certain level of skill or training. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC.

The authors of Fixed Index Annuities And Rising Interest Rates, Wade Dokken and Jack Marrion, are not affiliated with Lucia Capital Group or any of its subsidiaries.

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