Should investors shift from bonds because of the prospect of rising interest rates? Despite a potential or even likely rise in interest rates, investors should continue to view bonds as a diversifier for the riskier assets in their portfolio. While the fear of rising interest rates may be legitimate, a potential bear market in bonds is dramatically different from a bear market in stocks. In fact, the definition of a bear market in stocks is a 20% decline in prices, while to most investors a bear market in bonds is simply a period of negative returns.
Given many investors’ concerns, Vanguard recently published a white paper offering some perspective on the prospective risk of higher interest rates to a broadly diversified bond portfolio.