According to a new study by Edward Jones, one of the country’s biggest retail brokerages, 63% of Americans don’t know how rising interest rates will affect their retirement portfolios — their 401(k)s, IRAs, et al. — and 24% say they feel completely in the dark about what rising interest rates mean.
Bond yields have soared on the back of a big sell-off in the U.S. Treasury market this summer as markets price in a return to normalization following years of low rates and excess liquidity in the wake of the financial crisis.
And as Treasuries have declined in value, many bond investors have been caught off guard by something they aren’t used to seeing: negative returns in their monthly statements.
Meanwhile, Wall Street is telling clients to brace themselves for more.
“The secular 30-yr bull market in bonds likely ended 4/29/2013,” tweeted Bill Gross, who runs PIMCO, the world’s biggest bond manager. “PIMCO can help you navigate a likely lower return 2 – 3% future.”
Yet it’s clear from the Edward Jones survey and other anecdotes that everyday Americans — and even more sophisticated investors — still don’t know what the sell-off in the Treasury market means for their portfolios.
“I have had more than one high-net-worth broker tell me that his clients think the ‘Risk Free Rate’ means that you never see a mark down in the value of your Treasury portfolio,” says ConvergEx Group chief market strategist Nick Colas. “They are only now discovering their error, and the realisation is unwelcome.”
(The “risk-free rate” is a theoretical concept used in ubiquitous financial calculations like the capital asset pricing model to value securities. The “risk-free rate” in these models usually refers to the yield on U.S. Treasuries, where the rate of return — the yield on the bond — is viewed as “riskless” because Treasuries don’t contain default risk.)
If the sell-off continues, and the Federal Reserve does decide in September to begin to slow the pace of monthly bond purchases it makes under its quantitative easing program — as the consensus on Wall Street expects — more and more Americans will be waking up to the reality that bond funds can in fact lose money.
The full press release from Edward Jones is included below.
St. Louis, MO, — August 21, 2013 — According to a recent survey by financial services firm Edward Jones, 63 per cent of Americans don’t know how rising interest rates will impact investment portfolios such as 401(k)s, IRAs and other savings platforms. In fact, a full 24 per cent 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. Our financial advisors are focused on making sure investors have properly laddered their fixed income investments across various maturities.”
Why Interest Rates Matter
Bond prices typically move inversely to interest rates. This means that as interest rates rise, the price, or value, of bonds will decrease. Higher interest rates mean higher current income for an investor purchasing new bonds. For investors who already own a significant amount of fixed income, rising rates and corresponding falling bond values may mean lower overall portfolio value. Shorter-term bonds, while offering lower income opportunities, are less impacted by the drop in bond value seen in longer-term investments.
The survey of 1,008 Americans conducted by ORC International, gauged how well they understood the impact potential rising interest rates would have on investment portfolios.
Age and Awareness
One-third of respondents between the ages of 18 and 34 replied they have “no idea” how interest rate changes will impact a portfolio. As respondents’ age increased, their level of awareness increased as well with the exception of the oldest age group. One-quarter of those 65 and older also indicated they had “no idea.”
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 per cent and 39 per cent, respectively). A division occurs among respondents who admit they “do not understand at all” what those impacts may be. While 29 per cent of women admitted they do not understand the issue, just 19 per cent of their male counterparts did.
Respondents in the lowest income bracket were most likely to misunderstand the impact of rising rates, with 35 per cent of Americans surveyed identifying as such. Just 13 per cent of those with household incomes of $US100,000 or more indicated the same.
Additional survey results are available upon request.
Survey was based on 1,008 telephone and cell phone interviews of U.S. adults conducted between July 26 and July 29, 2013. The margin of error was +/-3%.
About Edward Jones
Edward Jones provides financial services for individual investors in the United States and, through its affiliate, in Canada. Every aspect of the firm’s business, from the types of investment options offered to the location of branch offices, is designed to cater to individual investors in the communities in which they live and work. The firm’s 12,000-plus financial advisors work directly with nearly 7 million clients to understand their personal goals – from college savings to retirement – and create long-term investment solutions that emphasise a well-balanced portfolio and a buy-and-hold strategy. Edward Jones embraces the importance of building long-term, face-to-face relationships with clients, helping them to understand and make sense of the investment solutions available today.
Edward Jones, which ranked No. 8 on FORTUNE magazine’s “100 Best Companies to Work For 2013,” is headquartered in St. Louis. The Edward Jones Web site is located at www.edwardjones.com, and its recruiting Web site is www.careers.edwardjones.com. Follow on Twitter @EdwardJones. Member SIPC.