Prudent Strategies For Retirement Income In A Rising Rate Environment

Prudent Ideas For The New Era Of Rising Interest Rates
Retirement Income
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After the 2008
financial crisis,
interest rates
stayed near
all-time lows.

The U.S.
economy has
strengthened in
recent years,
and we could
be starting a
long cycle of
rising rates.-7
-5
-3
-1
1
3
5
7
9
1997-I 2000-I 2003-I 2006-I 2009-I 2012-I
Q/Q%change(Annualized)
Actual and Forecast
U.S. GDP Growth Forecast
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© Advisor Products Inc., All rights reserved
.
.

Interest rates declined
for three decades.
20121982
Federal Discount Rate
Yearly Bond Returns
.
.

A sustained period of steadily
rising interest rates could mean
lower bond prices for years.
InterestRates
BondPrices
Bonds—a good investment
for the previous generation
of retirees—could decline in
value throughout the
retirement of the next
generation of retirees.
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.
.
.

For a retiree who needs
stable income, what
might higher rates mean?
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.

Should retirement-income
investors own bonds?
Should you sell bonds
because we could be in for a
long cycle of declining bond
prices?
.
.
.

“Those that fail to
learn from history,
are doomed to
repeat it.”
Winston Churchill

19811948
Yearly Bond Returns
In the last long-term rising rate cycle,
from 1948 to 1981, bonds lost money in
only five of the 34 calendar years.
.

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U.S. Bonds
0% 5% 10%
Standard
Deviation
Annualized
Return
100%
3.8%
4.3%*
*Standard deviation is a measure of volatility.
In the 1948-1981 rising rate cycle,
bonds averaged a 3.8% annual return.
Bonds showed a positive return during a long
period of steadily rising interest rates.
.
.
.
.

40%
Balanced stock and bond portfolio, 1948-1981,
showed an annualized return of 8.5%.
0% 5% 10% 15%
Annualized
Return
Standard
Deviation
10.5%
8.5%Large U.S. Stock
Bonds
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60%
40% © Advisor Products Inc., All rights reserved
.

Large U.S. Stock
Small U.S. Stock
Bonds
Cash
Annual
Return
Standard
Deviation
0.0% 5.0% 10.0%
Multi-Asset Portfolio, 1948 to 1981,
annually averaged a return of 9.5%.
• Different asset classes performed differently.
• Asset allocation and diversification worked.
• Modern Portfolio Theory worked.
40%
30%
20%
10% 9.5%
11.8%
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(5)
0
5
10
15
20
25
30
35
1948 1982
Rising Interest Rates
2012
Yearly Returns
Declining Interest Rates
.
.

1982-2012 Annual Returns
US Bonds: 8.82%
US Stock: 11.14%
US Cash: 4.72%
Rising Rates
1948-1981 Annual Returns
US Bonds: 3.83%
US Stocks: 11.00%
US Cash: 4.49%
Declining Rates
.
.

 Reassess holdings producing income.
 Past performance may be nothing like future
results. But that does not mean you should ignore
history.
 Bonds, in the 34-year period of rising rates from
1848 to 1981, provided positive returns.
 Don’t try to call the market.
 Avoid bets on a single asset class or security.
At The Dawn Of A New Rising Interest Rate Cycle
.
.
.
.

At The Dawn Of A New Rising Interest Rate Cycle
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 Shorten durations on bonds to reduce risk.
 Bond laddering is a good way to control rate risk.
 Short-term bonds let you ride a rising rate trend.
 A written investment policy specifying asset
allocations can help you manage downturns.
 Align your risk tolerance with bond durations.
.
.
.

AdvisoryFirm @advisoryfirm.com
888-274-5755
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See our periodic
financial reports

Disclosures
Large-Company U.S Stocks represented by Standard & Poor’s 500; US Bonds by US Intermediate Government Bonds
(SBBI) (1948-1975), and Barclay’s Capital Aggregate Bond Index (1976-2012); US Small Stock represented by
Ibbotson Small Stock (SBBI) (1948-1978), and Russell 2000 Index (1979-2012). US Cash represented by three-month
US Treasury Bills.
Bonds and bond funds or ETFs depreciate in value as interest rates rise. Foreign investing involves political and
currency risk and generally accepted accounting principles in many nations are not as well-established as in the U.S.
Diversification may not protect against market risk. Past performance is never a guarantee of your future results.
Gross domestic product (GDP) from U.S. Bureau of Economic Analysis. Actual GDP data presented through
December 2012; forecasted GDP from The Wall Street Journal survey of economists, March 8-11, 2013.
Acknowledgements
Market data and analysis based on research from Dr. Craig Israelsen of 7Twelve Portfolio.
Gross Domestic Product data from Fritz Meyer Economic Research.
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Prudent Strategies For Retirement Income In A Rising Rate Environment

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