Roth says he expects some volatility in the stock market as interest rates go up. "Long-term bonds and bond mutual funds will likely do poorly as we see major outflows," he says, adding that utilities, real estate investment trusts and emerging market funds could also take a hit. "We recommend keeping your bond exposure on the short end and staying diversified," he adds.
Roth says many of his younger friends and clients have the mistaken idea that bonds are a relatively conservative, safe investment. "That people think bonds are risk-free is scary to me," he says.
Tysk points out that many bond funds have been losing money since May. (Bond funds tend to lose money as interest rates climb.) Tysk says the appropriate response depends on the investor, including when he or she needs the money and what other sources of money he or she has. He encourages anyone with a retirement account to take a close look at where their money is currently invested and consider whether there are better places for their money than bond funds.
[See: 50 Smart Money Moves to Make Now.]
Current bond behavior is in contrast to the past 30 years, Gletner points out. "From Alan Greenspan to now, we've had a very loose and accommodative, meaning lowering rates for the economy, monetary policy. That's been very good for bonds … You can see that coming to an end," he says.
At the same time, Gletner says, the economy could sputter and rates could fall again. "For many investors, they shouldn't eliminate bonds from their portfolios. It might make sense to simply weather the storm, because people forget to rebalance, and unless you have a lot of time to stay on top of it, it makes sense to stick with diversification, and bonds have important diversification qualities," he says. When stocks are doing poorly, bonds tend to do better, offering an essential stabilizing force. Another option, he says, is to invest in bonds that are less sensitive to interest rates, such as high-yield bonds or floating-rate bonds.
For homeowners and buyers:
If you own a home and you haven't refinanced yet, it might be too late. "For my clients, we're not saying, 'Let's refinance today,' with a one-year high," Tysk says. He points out that according to MortgageNewsDaily.com, rates on 30-year fixed-rate mortgages are currently close to 4.75 percent, which is almost 1.5 percentage points higher than their 52-week low.
Still, in the context of history, rates are still quite low, says Chuck Schreiber, chief executive of KBS Capital Advisors. "The rate we can negotiate now is substantially below any other time in my career. The only given that we have is that we're highly confident that at some point in the future, interest rates will be higher," he says.
Similarly, if you're considering buying a home, try to speed up the process, Roth urges. "Don't drag your feet, because we'll see rates go up. You're not going to get a better opportunity to buy a house."