Don’t Know Much About… Interest Rates

In fact, according to a recent survey by financial services firm Edward Jones, a full 24% say they feel completely in the dark about the potential effects. Bond prices typically move inversely to interest rates, the company said in its research. In other words, as interest rates rise, the price of bonds will decrease. Higher interest rates mean higher current income for an investor purchasing new bonds. For investors who already own a significant amount of fixed income, rising rates and corresponding falling bond values may mean lower overall portfolio value. Shorter-term bonds, while offering lower income opportunities, are less impacted by the drop in bond value seen in longer-term investments.

Edward Jones conducted its survey to gauge how well American investors understand the impact that potential rising interest rates would have on investment portfolios.

One-third of respondents between the ages of 18 and 34 replied they have “no idea” how interest rate changes will impact a portfolio. As respondents’ age increased, their level of awareness increased in tandem, with the exception of the oldest age group. One-quarter of those 65 and older also indicated they had “no idea.”

Men and women are evenly matched when it comes to understanding there will be some impact to portfolios, but do not quite understand the specifics (40% and 39%, respectively). A division occurs among respondents who admit they “do not understand at all” what those impacts may be. While 29% of women admitted they do not understand the issue, just 19% of their male counterparts did.

Respondents in the lowest income bracket were most likely (35%) to misunderstand the impact of rising rates. Just 13% of those with household incomes of $100,000 or more indicated some confusion about the impact of increasing interest rates.

“While it’s hard to know exactly where interest rates will go in the coming weeks and months, we believe over the long-term that rates will continue to rise,” said Tom Kersting, fixed-income strategist at Edward Jones. “Fixed income is still an important part of an overall investment portfolio, but we want to remind investors that now is the time to consider buying shorter- and intermediate-term bonds, rather than just longer-term bonds. Our financial advisers are focused on making sure investors have properly laddered their fixed income investments across various maturities.”

The survey of 1,008 U.S. adults was conducted by phone and cell phone by ORC International on behalf of Edward Jones, between July 26 and July 29.