Updated May 27 at 7:27pm

Some long-term investments at risk if rates rise

By Patrick Anderson
PBN Staff Writer

In theory, an upswing in interest rates from their historic, post-recession lows should be a good thing for people saving for retirement. More

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FOCUS: ESTATE & RETIREMENT PLANNING

Some long-term investments at risk if rates rise

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In theory, an upswing in interest rates from their historic, post-recession lows should be a good thing for people saving for retirement.

Yet that might not be the case for everyone and after decades of falling rates, certain trusted investment vehicles may become less advantageous than they have been.

“It’s good that yields on short-term, safe investments will be going from zero to something positive,” said Robert E. Cusack, portfolio manager at WhaleRock Point Partners LLC in Providence. “It’s not good for longer-dated, fixed-income investments, which will fall in value, some substantially. The change in the direction of interest rates is prompting a re-evaluation of investment strategy from the largest public pension plans to the smallest 401(k) accounts of individual participants.”

Particularly vulnerable to rising rates are long-term bonds, which fall in price as interest rates rise and potential buyers can get higher yields from new bonds.

For 30 years, as interest rates have declined, investors have gobbled up bonds, including long-term bonds, and posted solid returns with less risk than the stock market.

However, with effective interest rates near or, at their lowest, below zero for so long, Cusack said it’s almost inevitable that future bonds will carry higher rates and be worth more.

That outcome would be bad for bond mutual funds, which have had a significant presence in retirement portfolios that now appears to be shrinking.

In late September, Boston-based Fidelity Investments announced that it would reduce the allocation of bonds in its target-date retirement funds and increase the share of equities.

“Now it’s clear that with investors withdrawing tens of billions of dollars of capital from bond mutual funds since May, individuals and institutions alike have gotten the message that the world has changed, and bonds are more a source of risk and real losses than safety,” Cusack said.

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