Don't lock in low rates for long terms

Experts advise caution, short durations

March 22, 2009|By Andrew Leckey | Andrew Leckey,Tribune Media Services

When it comes to the duration of fixed-income investments, many experts advise investors to keep it short.

Interest-rate yields are likely to remain stuck at low levels for a while. Once the economy starts to recover, however, inflation can be expected to revive and bring with it higher interest rates.

That's why, experts say, you shouldn't lock in today's rates for too long.

"Most people feel - and we agree - that at the back end of this recession there will be pressure on interest rates to move higher," said William Hornbarger, fixed-income strategist for Wachovia Securities. "People investing now who stay ultraconservative and short-term are going to earn about 3 percent, while earning more than that opens them to a lot of risks of duration and credit."

With recession, banking problems and uncertain stimulus results hovering, investors should stay conservative and cautious, Hornbarger said.

"In either municipal or corporate bonds, you don't want the average bond maturity to be more than five to eight years," said Ray Ferrara, a certified financial planner and president/chief executive of ProVise Management Group LLC. "You should also ladder your bond portfolio."

A ladder is a portfolio of bonds maturing at various intervals. It helps to insulate investors from rate fluctuations and lets them take advantage of positive rate moves when the shortest-term investments come due.

For example, investors can build a ladder of bonds that mature in two, four, six, eight, 10 and 12 years to come up with a seven-year bond average, Ferrara said.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.

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