Low interest rates have hurt retirees by sapping the income from their investment portfolios. But now that interest rates are rising, retirees have found that their bond holdings are losing value. How can retirees protect themselves against falling bond prices?
In the following video, Dan Caplinger, Director of Investment Planning at The Motley Fool, discusses three things retired investors should consider to minimize losses from their bond holdings. Dan notes that many retirees use long-term investments even though they have short-term needs, and he urges retirees to match up the time horizons of their portfolios more closely with those financial needs. Second, retirees should take a look beyond the safest fixed-income investments from the U.S. Treasury and federally insured banks to consider alternatives like corporate bonds. Dan notes that iShares Core Total U.S. Bond Market (NYSEMKT:AGG) has a mix of all different types of bonds, including both Treasuries and corporates. On the other hand, iShares Investment Grade Corporate (NYSEMKT:LQD) and iShares High-Yield Corporate (NYSEMKT:HYG) are focused on corporate bonds, with their respective focuses on different ends of the creditworthiness spectrum.
Finally, Dan suggests that retirees consider dividend stocks to provide part of their income. The high-yield dividend stocks that Vanguard High Dividend Yield (NYSEMKT:VYM) and similar ETFs own pay higher income than many bond investments. Moreover, unlike bonds, dividend stocks often offer growing payouts over time, as the stocks that you'll find in Vanguard Dividend Appreciation (NYSEMKT:VIG) show. Dan concludes by noting that stocks can't entirely replace bonds and that avoiding losses in a rising-rate environment is next to impossible, but smart moves can mitigate your potential fixed-income losses.