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Even with Low Rates, You Can Invest for Income
Not long ago, the Federal Reserve (Fed) announced that it plans to keep short-term interest rates near zero until late 2014. The Fed initially pushed rates to that level in 2008, in an effort to stimulate economic growth. Clearly, low interest rates have a wide-ranging impact — but what effect will they have on you, as an individual investor?
If you need income from your investments, then the continuation of ultra-low interest rates may be a matter of some concern, particularly if you own certain types of fixed-income investments, such as certificates of deposit. While CDs are insured, offer return of principal at maturity and provide regular interest payments, they are not risk-free. With low interest rates, you risk losing purchasing power.
Still, fixed-rate vehicles may well have a place in your portfolio. If you’re even somewhat dependent on your investments for income, you may need to broaden your search. Here are a few ideas to consider:
Build a bond ladder. Long-term bonds, by their nature, are more subject to interest rate risk than shorter-term vehicles. In other words, interest rates are more likely to rise during the life span of a longer-term bond — and when rates go up, the prices of existing bonds will fall. To help lower this risk, you may want to build a “ladder” of bonds of varying maturities. Then, if market interest rates are low, you’ll still have your long-term bonds earning higher rates, but if rates rise, you can take advantage of them by reinvesting the proceeds of your maturing short-term bonds. But remember to work with your financial advisor to evaluate whether a bond ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances.