The following is in response to our article, Five Strategies for a Rising Rate Environment, by Kane Cotton and Jonathan Scheid, which appeared last week.
I read with interest the above article. It was a good article and right in the mainstream.
My only comment is that the article left out a key strategy of how to deal with rising interest rates. Our solution to this problem is to create a custom bond ladder for each of our clients, as we described in our book, Bonds: The Unbeaten Path to Secure Investment Growth (Bloomberg Press, 2007).
Our clients hold individual bonds rather than bond funds. To see our reasons why, read our article Buy Bonds and not Bond Funds. In this posture, if a client has a bond ladder, rising interest rates are the upside case and not a problem. If interest rates rise, a client can reinvest their coupons, and bond proceeds as the bonds come due, in higher yielding bonds. In addition, if a client has a bond ladder, every year their entire bond ladder gets one year shorter.
When a bond is less than two years from its maturity date, it is unusual for it to sell at much less than its face value. Thus, it can be sold at a small loss and the proceeds reinvested in a longer term and higher yielding bond.
In summary, we pray every day for interest rates to go up. If over time interest rates on long-term tax-free muni bonds increase from 4% to 6%, our clients’ cash flow will increase by 50% over time. We don't mark-to-market. Our clients are interested in cash flow and generally hold all bonds until they come due, so a mark-to-market is not meaningful. Cash is king and cash flow can be used by individual investors to live the good life.
Warmest regards,
Stan Richelson
Scarsdale Investment Group, Ltd.
Blue Bell, PA
