While March Madness typically  refers to a basketball tournament, one could argue that phrase may describe the stock markets this year. Several issues are weighing on the markets right now, including spiking energy prices and market volatility. And don’t forget the threat of rising interest rates. All these combined economic factors are creating uncertainty.

Today, I want to discuss bonds and how they fit into the chaos. You may have heard on the news that the Federal Reserve met this week, and leading up to it, everyone was anticipating an interest rate hike from a quarter of a point to a half-point, with it landing at .25% on Wednesday. By the end of the year, most people predict four to five interest rate increases. If that happens, we may  see the Fed funds rate landing anywhere from 1 to 1 1/4% by the end of the year. With a fixed income or bonds, it’s easier to predict the markets with fixed rates.When it comes to the stock markets, I often compare those to a young teenager with unpredictable emotions that run wild. You never know which market you will get on any particular day.

Last year, the bond aggregate lost money. So far, this year’s bond aggregate is in negative territory. Bonds aren’t doing as well due to the negative impact that they’ve had on portfolios. My Advisors at Osiwala Financial Group recommend looking at different areas of the bond market to keep the “safe” part of portfolios  making money. We use a saying in my office: “Stocks are the “get-rich” strategy and bonds are the “keep-rich strategy”. Historically, bonds were the place where we put money for safety reasons. As of late, we’re not seeing much safety out of it. So, my Advisors are taking the fixed-income portion of the portfolio and running that through historical interest increases. An example would be to take your current fixed-income part and learn how it would have reacted during the Great Recession. This was when quantitative easing came to an end, quantitative tightening began, and interest rates increased. At the end of this exercise, we discover how your current bonds will fare. We also have a bond-alternative portfolio that we built, and we also run that portfolio through those same financial environments to compare.

Understanding how your portfolio holds up in a rising interest-rate environment is critical. I cannot stress this point enough. Now is not the time to sit back and be content and not do your due diligence. How do you do that? With Osiwala Financial Group’s financial planning tools starting with a complementary consultation with one of our Advisors.

All bonds are not created equally. Sometimes people think that just because they have bonds, every bond has the same value inside of their portfolio. But that’s not always the case. There are long-term bonds, short-term bonds, inflation-adjusted bonds, and global bonds, just to name a few. And the list of potential bond portfolios that deliver safety is endless. If you are putting money inside of the bond aggregate, that really is just a “catch-all” place. For example, in the short-term inflation-protected Treasuries, your yield on those is currently around 4.3%. That’s better than what you’re going to get in corporate bonds or in a normal treasury.I currently prefer the shorter-term, inflation-protected treasuries because as rates continue to increase, I believe that’s where people will get the biggest bang for their buck. If you start going out for too long on your maturity dates, you may suffer if interest rates continue to rise, experiencing and some losses inside your fixed-income portfolio. The safe route is to have it in short-term bonds in the short-term positions.

The other route you can go is the floating-rate bonds, also referred to as senior-secured debt. The floating rate bonds typically are a loan to a company where the company agrees that the interest rate will float with current rates. As rates rise, the actual charge on the loan is higher. Think of it like a variable-rate mortgage. Of course, people aren’t offering  those right now because you don’t want a variable-rate mortgage when they’re heading into a rising interest-rate environment. Borrowers are attracted to the variable-rate mortgage when they think they’re  going into a falling interest-rate environment. This allows the mortgage payments to decrease along with interest. In a rising interest rate environment, we want to own those senior-secured debts that float on interest rates. As rates go up, we don’t have the deterioration of the net asset value, but we get to take part in the increase in interest rates. One thing is for sure, you don’t want to take all your fixed income and go into one of these different sectors. You want to make sure that you have diversification within that fixed-income portfolio.

It’s  essential to stress-test your portfolio as the current environment changes to discover how it will handle different economic conditions. It’s also crucial to know how it may affect your overall financial plan. Without stress testing it, I believe people are missing out on the opportunity to protect themselves financially. The month of March is a testament to that. How can you do that? Right now, there are some of you reading this article who have a portion of your money in fixed income or bonds of some sort and understanding how those bonds have fared in prior rising interest rate environments is critical. Click HERE to request a complimentary appointment by phone, in-office, or virtually and speak to one of my Osiwala Financial Group Advisors about stress-testing your portfolio.