I recently received an email from a radio show listener posing the following scenario: You’re in Vegas and have $1,700,000 riding. A guy walks up to you with a deal: he’ll give you a bet with an upside of $1,800,000 or a downside of $1,000,000. You don’t know the odds. Would you make this bet or pick up your chips and walk?
At the beginning of each year, I present my fearless forecast. This year, I predicted the Dow would hit 21,000. I thought it might take awhile to hit that mark, but it didn’t. We took the express route to 21,000. Now, I think we’ll see Dow, 23,000—but this time I think we’re going to take the scenic route.
The Federal Reserve will very likely raise interest rates soon. You may have heard that bond values go down when interest rates rise. Not necessarily: Not all bonds are hurt by higher interest rates, and some actually go up. It depends on the type of bond.
Janet Yellen recently said it was likely the Federal Reserve would raise interest rates this year. Bond values typically go down when interest rates go up, so several of my clients have asked me if they should sell their bonds.
It’s true that bond values usually have an inverse relationship to interest rates. Here’s an example: Let's say you have a bond that is paying 3 percent and the prevailing interest rates are 3 percent. Then interest rates are raised to 5 percent. If you decide to sell that 3 percent bond, do you think anyone would want to buy it when other investments are now available for 5 percent?