PIMCO (PacificInvestment Management Company, LLC) produced a market-relevant article earlier this month entitled “Stay The Course”. This article discusses four (4) reasons why long-term investors should remain focused on their goals and not fear rising rates. Click here to view the full article (with visuals!) in PDF form.
1) Rising Rates Build Income: With interest being the primary
driver of bond returns, reinvesting into a gradually rising rate environment
can actually help build long-term growth. When rates rise, new bonds may
pay higher, which can increase what you (as a lender) receive in the long run.
2) Lower Volatility Helps Preserve Capital: During uneasy times in
the market, investors are often reminded why fixed income investments can be
solid anchors for their portfolios. Bonds have historically been less
volatile than stocks, while also providing capital preservation, income and
growth, and low-to-negative correlations to equities.
3) Cash ‘Safety’ Comes at a Price: Investors concerned about
market fluctuations and short-term bond volatility may be tempted to withdraw
their investments until prices stabilize. However, with cash and money
market investments typically yielding rate of returns close to zero, and
especially after accounting for inflation, these types of investments can actually
provide a negative return. Compounding over the long-term, maintaining
investments in bonds will almost always generate a higher rate of return.
4) Experts Have Access to a Diverse Toolset: Although
mainstream media tends to focus on U.S. Treasuries (which are the most
sensitive to changing rates), the “market of bonds” is exceedingly diverse and
global, including corporate and high yield bonds, mortgage-backed securities,
floating rate issuers, emerging market bonds, and many others. Since each
sector or asset class responds differently to economic and market trends, a
skilled bond fund manager should be capable of diversifying a portfolio which
can defend against capital losses while also capturing a range of growth
PIMCO is the
world’s largest bond investor and one of the world’s largest active global
fixed income investment managers. As of the end of 2012, PIMCO had $2 trillion in
assets under management.