How to stress-test a portfolio's interest-rate sensitivity

Following this rule of thumb might serve you well in case interest rates go up.

Christine Benz 30 July, 2018 | 5:00PM

Question: As a 68-year-old new retiree, I have about half of my portfolio in bond funds. But frankly, I'm questioning the wisdom of such a large fixed-income position given the prospect of higher interest rates. How can I tell how interest-rate-sensitive my portfolio really is?

Answer: Your question is a timely one. Investors, especially those in or nearing retirement, are rightly concerned about how the so-called safe portions of their portfolios are likely to behave in a sustained period of rising interest rates.

It's definitely smart to think about what risks might lurk in your portfolio, particularly in segments that you expect to be drawing upon for living expenses within the next several years. Central banks in both Canada and the U.S. have started to increase interest rates over the past year and have indicated that more rate hikes are likely in the near future. That has already put pressure on bond prices and will continue to do so if rates keep heading up.

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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