Much of the attention over the last few months on the effects of interest rates and bond tapering on your portfolio focus on the immediate consequences – a decline in bond values. But rising interest rates can be good for your portfolio over a longer time period due in part to reinvesting interest income. Not to mention, it is a strong signal that the US economy can come off of life support. See the chart for details.
So why did investors leave bonds during this summer? Could it be that investors are afraid another recession is around the corner and don’t have confidence in the markets? Perhaps they are looking for a reason to sit in cash willing to wait for more clarity to come from the Fed.
That could be a costly mistake… just ask those who are sitting in cash since the Great Recession.