Making money with your investments can sometimes be a difficult task when interest rates are low. Traditional offerings such as government bonds and CDs are going to pay very little, and the values of outstanding bonds are going to drop when interest rates start to rise. Fortunately, there are still a few options available for those who need to offset losses or generate income from their portfolios. Here are some things that you can do to protect your nest egg from the effects of a zero interest rate environment.
Look to Stocks
If your portfolio is heavily weighted with bonds and bond funds, then you may want to consider reallocation a portion of them to stocks. This can be advantageous because stocks often perform well when interest rates are low, and you may be able to avoid more future losses in your bond portfolio when rates start to rise. If you are seeking income from your portfolio, then look to preferred and utility offerings to get a higher dividend yield. They can provide you with additional income that may not be as susceptible to price drops when rates rise.
Owning shares of stock may also enable to you to write covered calls, which can generate an additional stream of steady income on top of any dividends that you may receive. Just be prepared to pay taxes on any gains that you realize if your stock gets called out. However, you can simply use the proceeds to buy back in and continue writing calls in the future. The amount of income that you reap from this strategy will depend largely upon how close your call strike price is to the market price of the stock. The closer the strike price is to the market price, the higher the premium that you will earn-and the greater the risk that you’ll get called out.
Hedge Your Positions
If you believe that interest rates are going to rise and you have substantial holdings in bonds or brokered CDs, then consider buying puts on one or more of the major bond indices in order to profit from the drop in price that will inevitably accompany the rate hike. This can provide you with a corresponding profit that will offset your losses when rates rise.
Hold Till Maturity
If you hold all of your fixed-income offerings until they mature, then you will receive the full amount of your principal back in addition to the interest that you have earned. This way you will suffer no losses in your bond portfolio even if their values drop in the secondary market while you still hold them.
Harvest Tax Losses
If you see substantial losses accruing in your taxable retail portfolio as rates rise, then you may be wise to sell some of those holdings and realize a capital loss that you can use to declare against any capital gains that you reap during the year. Just be sure to wait for at least 30 days before buying back your bonds in order to satisfy the IRS Wash Sale Rule. You can also write off up to $3,000 per year of losses against ordinary income if you have no capital gains against which to net your losses. Any excess amount will carry over to future years until the entire amount of the loss has been used. You might also want to consider using the sale proceeds to purchase shares of a major bond index instead of buying back your old holdings in order to diversify your portfolio. One advantage to this strategy is that you will not need to wait for 30 days to buy the index, as it will not be considered a like-kind asset.
These strategies can allow bond holders to soften the blow that will come when interest rates start to rise. They can also provide investors with a higher level of income now and help them to reduce their tax bills in some cases. For more information on what you can do to protect your portfolio during periods of low interest rates, consult your financial advisor.