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+++++++++++++++++++++++++ + +++ + BuSINESS SECTIoN +++ +++++++++++++++++++++++++ bonds: Duration risk and rising interest rates by paul D. guerra IN M A R C H O f T H I S y e a r, the Financial Industr y R e g u l at or y A ut hor it y (FINR A) published a n investor alert — "Duration — What an Interest Rate Hike Could Do to Your Bond Portfolio." While the common watercooler discussion these days tends to focus on the new highs in the stock market and the perceived risk of a correction or a pullback, little is being written about the risk to bond portfolios in the event of rising interest rates. Interest rates are currently hovering around historic lows. In fact, an argument can be made that we are in the 30th year of a "bull" market in bonds. Interest rates have been on a general decline for nearly 30 years, dating back to the double-digit interest rates of the Carter Administration. While volatility in the stock markets is something that most investors are aware of and many actually understand, few investors pay the proper attention to the risk of volatility in the bond markets. In fact, some investors feel that the way to help reduce their exposure to the volatility and risk of the stock markets is to shift their investment assets to the bond markets. Given the historical low interest rates today and the real possibility of rising interest rates in the months and years ahead, this strategy may, ironically, be actually increasing the overall risk of investors' portfolios. The FINRA report discusses, in detail, the concept of duration risk. What exactly 32 | Cleveland/Akron/Canton MD News is duration risk? According to FINRA, "Duration risk is the name economists give to the risk associated with the sensitivity of a bond's price to a 1% change in interest rates."* For example, bonds with a duration of 10 years will decrease in value by 10% if interest rates rise by 1%. Bonds with a duration of 20 years will decrease in value by 20% if interest rates rise by 1%. These scenarios are very generalized and are impacted by certain variables including a bond's call features, credit quality and maturity, but the basic concept of duration and duration risk is something that individual investors should view closely to determine if their portfolios have exposure to such risk. In general, the higher a bond's duration, the more sensitive it will be to interest rate changes. Note that bonds, if held to maturity, are expected to return to the investor the face value (par value) of the bond. The price fluctuation relative to duration and rising interest rates is relevant to the market value of the bond prior to maturity. If a bond is sold prior to maturity, the price will be affected by prevailing interest rates and duration. It is also important to keep in mind that a bond's low duration does not necessarily translate to low risk. Again, according to FINRA, "In addition to duration risk, bonds are subject to inflation risk, call risk, default risk, and other risk factors."* In short, investors need to be cautious with regard to the overall risk of their ■ MDNEWS.COM ■ JULY-AUGUST 2013 bond portfolios. While fixed-income investments in general and bonds in particular can provide a very important way to diversify your portfolio and help reduce the level of market risk inherent in equity portfolios, they are not without their own potential for volatility and market loss, and should not be blindly viewed as a low-risk or risk-free alternative to the more commonly discussed risks associated with the stock market. Paul Guer ra is the P resident of Brookshire Wealth Management in Canton, OH. For more information visit www.brookshirewealth.com, or e-mail Mr. Guerra at pguerra@brookshirefinancial.com. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Brookshire Wealth Management is a separate entity from WFAFN. ■ *FINRA Investor Alert: "Duration — What a n Interest R ate Hike Could Do to Your Bond Portfolio." Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Brookshire Wealth Management is a separate entity from WFAFN. Investments in securities and insurance products are NOT FDIC INSURED/NOT BANK GUARANTEED/MAY LOSE VALUE.

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