3 Unconventional Fixed-Income Investments

With rising interest rates on the horizon, consider revamping your bond portfolio.


We all know what happens when interest rates rise—bond prices fall. It's an inverse relationship. Even though investors know and understand this concept, they rarely take action to avoid a fall in their fixed-income investments. Many investors sit on their bonds or bond funds, no matter how long-term they are, without ever contemplating a change. This is truly one of those times when the worst thing you can do is nothing.

While you may be totally safe with your long-term bonds by holding them, consider the possibility that you may need some of your money prior to those bonds maturing. If you need income, you should consider moving a portion of that fixed-income allocation to a different position.

[In Pictures: 6 Numbers Every Investor Should Follow.]

Also, consider your income investing options. You can buy short-term bonds, short-term bond funds, bank-loan funds, short-term treasuries, short-term municipal bonds, short-term CDs, and even money market funds. All of these are better alternatives to losing money to rising interest rates.

But let's also consider a couple of alternative investments you may not have thought of:

Non-publicly traded real estate investment trusts (REITs). These REITs pay dividends based on rents paid by tenants to the REIT companies (the building owner). They tend to be more stable than public REITs, because they don't move with the stock market. In addition, they are not impacted by interest rate changes, because rent payments are set in stone by the lease agreement. But, while non-publicly traded REITs tend to be fairly stable, do your homework and research which companies carry what types of risk. Keep an eye on the quality of the REIT, the types of buildings they buy, the tenants, lease terms, and the leverage and diversification of their buildings or holdings.

[For more investing and money advice, visit U.S. News Money, or find us on Facebook or Twitter.]

Structured notes. These bonds cater to your specific investment needs. They are structured to address whatever it is you want to accomplish with your investment. Often they are set up to offer principal protection and even FDIC insurance.

This type of note typically has two parts. The first is a zero-coupon bond, which at maturity will be equal to the original investment (the principal protection part). The other is invested in an index, which provides the growth and income for the note. They can be structured in almost any manner imaginable. Unfortunately, most investors—and even advisers—have never even heard of them.

Long/short bond funds. With interest rates at all-time lows and an increase on the horizon, you might even consider betting against the bond market. One of the best ways to do that is to short—or bet against—bonds. I don't recommend you do this on your own. Instead, you might consider using a long/short bond fund in which the manager buys bonds he thinks will increase in value (buying long), and shorts bonds he thinks will lose value (selling short). This is a way to truly take advantage of the current interest-rate environment. Keep in mind, this is a fairly new strategy, so there are only a few funds that can actually short the bond market. Again, do your research.

[See Why Copper Is the Metal to Watch.]

There are ways to take control of your fixed-income investments, but you cannot sit on your hands. You must take action.

Good luck and happy investing.

Kelly Campbell, CFP® and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Alexandria, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.