Most often, when we think of risk, we think of money invested in the stock market. There are several different kinds of risk, and there is some kind of risk in every investment. Many like to think that bonds are a safe investment, but the fact is that when interest rates rise, the value of existing bonds decline – including bond funds.
Because of the Fed’s quantitative easing program, interest rates have been kept low for some period of time. When they will begin to rise again no one knows, but rise they will. For the last few weeks, we have witnessed rising interest rates on treasury securities. The Fed tells us that QE will not end any time soon, but could see some pullback in the amount of money they have been printing. Whenever this does finally happen, interest rates are sure to rise.
The chart below shows the current and reset yield on 10 year treasuries. Columns of X’s indicate rising yields, while columns of O’s indicate decreasing yield rates. The scale on the chart is the 10 year treasury yield multiplied by 10. The sporadic numbers and letters within the X’s and O’s indicate months of the year. By looking at the chart, it’s easy to see that rates are on the rise, and they now exceed the level they reached earlier this year. (Click on the image to enlarge.)
For those who have placed a portion of their 401(k) assets in Target Date funds and wanting to implement a set-it and forget-it strategy, there may be a significant downturn in the value of their 401(k) because of rising rates. Depending on the particular target date, a substantial portion of the Target Date fund may be invested in bonds.
Going forward, we need to keep a close eye on these yields, and have a plan to deal with the situation regardless of which way the yields move.
The second thing that can go wrong from here is a decline of the stock market. We are seeing all-time highs in the major indexes. The old adage of what goes up, must come down, and that is certainly true with the stock market. The image below shows the S&P 500. Notice how the chart has generally increased over the last several months.
The major market indicators at this time indicate high risk in the market. This doesn’t necessarily mean that we should sell just because the risk is high, but it certainly suggests that we should pay closer attention. Just as we pay closer attention to our driving when the streets are wet, we should pay closer attention at this point in time, and have a plan in place if things go well, and a plan if things do not our way.
The charts above were created by Dorsey Wright and Associates. The postings on this site are my own and do not necessarily represent Dorsey, Wright & Associates positions, strategies or opinions.