If the decline in bonds last summer put a serious dent in your portfolio, it’s time to circle the wagons so that future interest rate leaps won’t leave you scrambling to make changes at the most inopportune time.

The crux of the problem for most bond investors is the difficulty of factoring in the potential percentage change in net asset value for a theoretical change in interest rates. These factors become even more complicated when a portfolio is commingled with different types of bonds. We toss around financial lingo such as: Effective duration, average life, or modified duration. However, the complex calculations that spit out a portfolio’s sensitivity to interest rates are ultimately just a measure of time.  That measure then needs to be put in real terms for an investor that may not have institutional analysis tools for calculating specific risks.

I bring these issues up to remind retired investors to make changes when volatility is low. Interestingly, of all the portfolios that get submitted for review at our firm, the average asset allocation to fixed-income seems to lie in the realm of 50%. This is completely appropriate, given the usefulness of debt to establish a safe and steady income stream. After all, conservative investors are often drawn to these assets for their relatively high yield and low volatility given the current state of the financial markets.  Yet I believe every fixed-income investor should familiarize themselves with the realities of interest rate exposure and develop a plan for the next rapid rise in treasury rates.

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