NEW YORK (MainStreet)—Investment portfolios are facing greater risk week by week -- and most investors simply aren't aware of it. Nearly two thirds (63%) of Americans are oblivious to the impact rising interest rates can have on their 401(k)s, IRAs and other investments, according to a survey by Edward Jones. In fact, a full 24% say they feel completely "in the dark" about the potential effects.
"While it's hard to know exactly where interest rates will go in the coming weeks and months, we believe over the long-term that rates will continue to rise," said Tom Kersting, fixed income strategist at Edward Jones. "Fixed income is still an important part of an overall investment portfolio, but we want to remind investors that now is the time to consider buying shorter- and intermediate-term bonds, rather than just longer-term bonds."
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The relationship between interest rates and bond prices is still a mystery to many investors. While it may seem counterintuitive, as interest rates rise, the price, or value, of bonds will decrease.
Of course, higher interest rates can also be good news for investors seeking income -- if they are buying new positions in individual bonds. For those who already have fixed income investments in their portfolios, rising interest rates will mean falling values in their current holdings.
However, those interim "losses" are not realized if an individual bond is held to maturity, barring an issuer default. Bond funds, comprised of a multitude of holdings of varying maturities, don't have that shelf-life advantage.
One-third of respondents between the ages of 18 and 34 replied they have "no idea" how interest rate changes will impact a portfolio. The level of awareness was higher for more-senior investors, except in the oldest age group. One-quarter of those 65 and older indicated they had "no idea."
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Men and women are evenly matched when it comes to respondents who, while understanding there will be some impact to portfolios, do not quite understand the specifics (40% and 39%, respectively). A division occurs among respondents who admit they "do not understand at all" what those impacts may be. While 29% of women admitted they do not understand the issue, just 19% of their male counterparts did.
Respondents in the lowest income bracket were most likely to be unaware of the impact of rising interest rates on their investments (35%) while just 13% of those with household incomes of $100,000 or more admitted the same lack of knowledge.
--Written by Hal M. Bundrick for MainStreet