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Surviving Volatile Markets |
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by Reprinted with permission of Investment Representative Celine Richardson of EdwardJones
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Friday, 18 July 2008 |
 Despite volatility, it's important not to lose sight of your long-term investment goals.
Risk and Price Fluctuation
You generally don't need to be concerned about short-term price fluctuation if your bonds are providing the following:
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Income
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Diversification
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Return of Principal
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Less price volatility than with stocks
But
you should understand that every investment possesses some degree of
risk. Three primary risks for fixed-income investments include:
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Interest rate risk -
When interest rates
change, they impact the prices of all fixed-income investments. The
same change in interest rates will have a greater impact on long-term
maturities versus short-term maturities. However, interest rates of
short- and long-term investments don't usually change by the same
amount. Since no one can predict interest rate changes, we recommend
laddering to help reduce interest rate risk.
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Credit quality risk -
This is related to the
chance that your fixed-income investment could default. Owning bonds
from a variety of issuers in different sectors or industries can reduce
the impact of credit quality concerns.
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Reinvestment (or call) risk -
When your
bonds mature or are called (redeemed), if you want to buy more
fixed-income investments, you'll have to do so at the current interest
rate. To help reduce this risk, own bonds with a variety of call dates
and those that are not callable. Laddering also can help reduce this
risk, which is why we recommend not owning too many short-term
investments.
Keys to Survival
Understanding
the benefits and risks of fixed-income investments can help you weather
price changes during volatile markets. The keys to survival are to:
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Stay calm -
Take a long-term perspective and remember why you purchased the bonds in the first place.
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Buy quality -
Own investment-grade quality bonds.
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Diversify -
Own bonds from a variety of issuers in various industries with a wide range of maturities.
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Remember that selling is not always the answer -
Price declines due to changes
in interest rates or supply and demand imbalances in the market have
historically rebounded with time. With changes in credit quality, you
and your financial advisor should determine if the bonds you own are
still appropriate.
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Look for buying opportunities -
Since prices and interest rates often move in opposite directions, any
price declines can mean higher rates are available today.
Contact your local financial advisor today for a complimentary portfolio review.
Mario D. De Rose, CFA
Fixed Income Strategist
Diversification does not guarantee a profit or protect against loss in a declining market.
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