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When is it safe to transition my investments from equities to bonds?

How do you determine when it is safe to move assets from equities to bonds given the prospect of rising interest rates?

Bonds / Fixed Income, Stocks
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May 2017

Whether you want to take profits on your equities or lighten up your exposure to equities, in a rising interest rate environment you may want to consider shorter duration bonds. This reduces your sensitivity to movements and U.S. interest rates. You can take on more credit risk so you add some yield cushion to your portfolio. If you are investing in high yield bonds, you are already shortening duration versus investment grade corporate bonds, and you are increasing the yield cushion. You can also look for less correlated asset classes that also provide yield. This may include equity income type strategies or emerging market debt type strategies.

There are a number of different ETF solutions for investors to target rising interest rates. One might be on the credit side on the high yield space or a high yield bond ETF. On the opposite side of the spectrum is an interesting credit opportunity with short duration is an investment grade floating rate note.

If you think interest rates are headed up, you can protect yourself by investing in debt securities whose interest payments adjust regularly. Floating-rate funds invest in bank loans made to low-quality companies. The rates on these loans usually reset every 30 to 90 days at a few percentage points above a benchmark of short-term rates. Until the financial crisis struck, bank-loan funds had done a superior job of delivering above-average yields with minimal movements in their share prices. In 2008, the average bank-loan fund surrendered 30%, although the sector has rebounded strongly, gaining 42% on average in 2009 and 9% last year.

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