Why You Shouldn't Be Afraid of Rising Interest Rates

NEW YORK (TheStreet) -- There is no question interest rates will rise eventually. When they do, interest rate-sensitive investments like bonds and bond funds will likely fall, perhaps even sharply.

Investors need to recognize that rising interest rates will be a positive sign that our and the global economy are finally on solid footing and that a return to normal has finally arrived.

From a historical perspective, the notion that stocks fall when interest rates rise is simply not true. Since 1980 the Federal Reserve has raised interest rates 67 times. During these periods of interest rate hikes, the S&P 500 rose 60 of the 67 times in the two years following the first increase, representing a positive reaction by stocks nearly 90% of the time.

Pretty good odds, if you ask us.

Don't wait for the rates to rise, prepare now. First, sell bonds, the sooner the better. Let's assume that interest rates stay at current levels. Given this assumption, your bonds and bond funds will hold their value and you will continue to earn whatever interest the yield of the bond provides. Yields are low, and the interest income you earn will continue to be anemic.

It's not ideal but where's the hidden danger? Unlike interest rates, inflationary pressures are starting to rise, which means that your "real" income -- the inflation adjusted income -- you receive is even lower than you think, perhaps even negative.

It's a risk that has remained concealed to the average retail investor although it is certainly on the minds of professional money managers and institutions. If these same managers start to sell bonds even as interest rates remain steady, the selling pressure could have an impact on your bond prices.

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