Even During Stable Times, it Pays to Think About Volatility05-21-2014 |
As Memorial Day approaches, we pause to remember all the Americans who made the ultimate sacrifice in service to our country.
Thanks to these brave men and women, today residents of the United States are living in a time of relative peace and security. One of the other benefits of their many sacrifices is economic stability. The U.S. boasts, by far, the world’s largest economy measured by gross domestic product, fully 75% larger than China’s, which sits in second place.
But economic steadiness is never a given. Geopolitical events, financial crunches and other problems can lead to volatility in the markets. And volatility can expose a retirement portfolio to undue risk. Of course, some investments are more volatile than others. Keep this in mind: It’s a given that an investment whose market price, over time, moves especially higher or lower than its mean or moving average price (shows higher volatility, in other words) carries higher risk.
To help mitigate risk in a portfolio, municipal bonds are one type of asset to consider. In general, munis may display lower volatility than other securities. History shows this to be the trend.
Changes in interest rates can be another source of volatility in a portfolio. Of course, there is an ongoing debate about when interest rates will (inevitably) rise and to what extent. Just last week, however, global bond rates dropped to their lowest level of 2014.
That’s why it is so important to review the duration of a bond or bond fund before you invest. Generally speaking, duration (expressed in years but actually a complicated mathematical calculation) is a measure of the extent to which a bond’s prices will be impacted by changes in interest rates.
A bond with a lower duration will, in most cases, have a less volatile pricing trend. And vice versa.
Not all municipal bonds are created equal. So in your search to mitigate volatility risk in your portfolio, be sure to consider all the details of an offering.