Taylor Schulte | Guest Columnist

“By failing to prepare, you are preparing to fail.” – Benjamin Franklin

The Federal Reserve Board has announced it won’t be ending its bond-buying program just yet.

Although the Fed will attempt to keep interest rates low, rock bottom rates can’t last forever.

In anticipation of higher rates, we think now is a great time for investors to be proactive about their portfolio.

Here are five tips to help you prepare:

1) Avoid long-term bond mutual funds. Since the beginning of May, the 10-year Treasury has soared more than 84 percent – one of the most rapid increases on record. During this time period, some bond mutual funds with longer durations experienced losses in the double digits. Although you will be forced to accept a lower yield, consider utilizing shorter duration bond funds to help protect principal in a rising rate environment.

2) Don’t chase yield. My father told me at a young age, “If it seems too good to be true, it probably is.”  While it is true there are investments that will pay you a higher than average yield, don’t think these come without added risk. Like long-term bonds, high yielding investments can be extra sensitive to interest rate moves.  For example, the iShares High Dividend ETF (HDV) returned a negative 2.25 percent in the month of May when interest rates spiked. In contrast, the S&P 500 returned a positive 2.34 percent during the same time period.

3) Hold individual bonds to maturity. The general rule of thumb is an increase in interest rates will cause bond prices to fall. While this inverse relationship does exist, holding individual bonds to maturity will combat this problem. For that reason, you might consider working with a professional to build a portfolio of laddered, individual bonds rather than owning mutual funds.

4) Diversify. We prefer stocks to bonds. But if you are a conservative investor with an allocation to bonds, it is more important than ever to be properly diversified. One tip is to consider an unconstrained, “go anywhere” bond fund for a piece of your allocation. These funds give the manager broad flexibility and have historically helped to reduce interest rate risk in a portfolio.

5) Consider dividend-paying stocks. With interest rates trending upwards, income-oriented investors have become wary of bonds due to their sensitivity to interest rates. For investors looking for income that can tolerate some volatility, dividend-paying stocks might be a solution. Rather than buying the highest yielding securities, we prefer owning companies that have a long history of paying dividends and increasing them. For example, Coca-Cola Co. and Johnson & Johnson have increased their dividends for 51 consecutive years, providing a stable income source for investors.

We have not seen interest rates this low since the 1940s. With nowhere for rates to go but up, we believe this is an important time to be proactive and plan ahead. For a free “Horizon Report,” providing an analysis of how a rise in rates will affect your fixed income holdings, please contact my office.

Taylor Schulte is a CFP® professional for Beverly Hills Wealth Management in Downtown San Diego. Schulte specializes in providing independent, objective, financial advice to individuals, families, and businesses. He can be reached at 619-881-0388 or [email protected].