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Should You Fear Higher Interest Rates?

"We have a very strong asset level of $13 billion, with a surplus level of about $9.5 billion, with annual premiums approximately $5 billion," LaFleche said.

"We have always had a large equity exposure, of roughly 50%, enabled by a very strong balance sheet. The typical competitor has far less [in equity investments], around 20%, and some are all fixed income."

Looking ahead, LaFleche expects rates to rise moderately, near-term:

"Our feeling over the next year is for the rate on 5-year Treasury bonds to go up 50 to 75 basis points. If that happens with a bond duration of about five years, our bond returns will be slightly positive, losing 2.5% on principal, but we would collect our coupons and make small money."

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LaFleche also pointed out that the downside faced by bond-holders under the above rising-rate scenario, "is not a huge risk when compared to the potential downside of equities."

A bond portfolio's duration is its average number of years to maturity. Generally speaking, the shorter the duration, the less price volatility for the portfolio as interest rates rise and fall. Shorter duration portfolios also tend to have lower yields than longer duration portfolios.

Under LaFleche's expected scenario, there isn't much risk for bond holders over the next year, especially when considering the interest payments coming in.

What about stock prices when interest rates rise moderately?

"We are going into a more normal [economic] environment and earnings are still good, so stocks can offset the losses from rising rates with earnings growth and [price-to-earnings] multiple support from a more normal bond/stock valuation tradeoff," LaFleche said.

But he doesn't expect investors to see the type of bull market for equities this year that they saw last year.

"I think earnings growth will continue in an upper single-digit rate, but I don't think multiples can continue to rise at last year's rate. So we are expecting upper single-digits returns for stocks.," LaFleche said.

So for investors managing diversified portfolios, LaFleche doesn't see much to fear from rising interest rates, at least over the next year.

Very long-term investors seeking to maximize returns over the long haul need to consider their own level of risk tolerance.

Do you check your 401K account balance each day? Or are you content to let the market play out, with the knowledge that when stock and bond prices decline, your current investments are going in at lower prices?

If you have decades until your expected retirement, patience and diversification are probably best, and the Wells Fargo Advantage Dow Jones Target Fund described above provides food for thought.

If you are getting close to retirement, the standard advice is to move toward an income-oriented portfolio. This means bonds, preferred stocks and common stocks with strong dividend yields.

And if you're just starting out and beginning to fund a retirement account, take advantage of what's out there. Does your employer provide matching 401k contributions? If your employer matches contributions up to 3% of your salary, for example, then you will make an immediate 100% return on each contribution. That's a hefty return in any market.

Then, call the plan administrator and speak to a retirement services representative. They can help you make prudent investment choices, depending on how long you plan to continue working and how much market risk you can tolerate.

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-- Written by Philip van Doorn in Jupiter, Fla., and Antoine Gara in New York.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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