Financial Focus 4-12

 

Financial Focus

Brought to you by Edward Jones

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.

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