With the Fed keeping interest rates at zero, interest rates have nowhere to go but up in the future. Here are five investment moves you should consider before the rates change.
Examine all your investments in closed-end funds. While they have probably done great lately, many closed-end funds use leverage to increase their returns, making them more sensitive to interest rate changes. A fund might be able to make money borrowing at 2 percent and getting a 4 percent return, but when borrowing costs become 4 percent, it's not easy money anymore.
Lower your bond exposures. Net outflows from bond funds were $1.3 billion in November. When the interest rate rises, the value of your bond funds will fall. However, interest rates only affect values of bonds that need to be sold. For those who hold individual bonds until maturity, you will get the full value of your principal, assuming the issuer is still financially sound.
Shorten your bond durations. Your bond funds will likely lose value when the interest rate rises. But if you still need to hold bonds, then it's probably a good idea to shorten the durations of your holdings. The shorter the duration, the less the interest rate affects its value. In fact, this is true even if you buy individual bonds.
Make your moves with debt soon. You are unlikely to find a better time to consolidate your debt and find low interest alternatives for the debt that you are carrying than now. Whether it's 0 percent balance transfer credit cards or getting a loan using your assets as collateral, this is probably a good time to make the move.
Be careful with leverage, especially with real estate. Many people are waiting for real estate to become a great investment again. But much of the reason why home prices accelerated over the past two decades is because of increasingly affordable credit. As our economy picks up and the government slowly withdraws its support for the housing market, mortgage rates will probably shoot back up, becoming a drag on housing prices for years to come. For people planning for retirement, this means focusing less on trying to move into a huge house and reducing real estate investments. Sure, there could always be a bubble in the housing market again, making you regret this decision temporarily. But if I were you, I wouldn't bet on it.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.