Think Janet Yellen has an easy job? The San Francisco federal reserve has published a web game to let you see how smart you really are. In the game your job is to keep inflation in check and unemployment low by adjusting short term interest rates.
The game can help you understand the basics of monetary policy and explore some of the correlations of our economy. It will not present you with the challenges of dealing with government shutdowns, poor tax policies, or financial meltdowns, but it will provide you some entertainment as you learn the basics.
Well, we just had another FedWatch orchestrated by the financial media. Did you miss it. I hope so. The fed did not raise interest rates today in spite of all the speculation by the TV talking heads. I cannot guess the man hours that are wasted pontificating about what the fed should or should not do.
If your investment time horizon is Fed meeting to Fed meeting, you are not an investor at all. You are a speculator. Yes, the Fed will likely raise interest rates again at some point. Will it matter? Sure, for about six months. If you expect to live beyond the next six months – keep calm and carry on.
Duration has a special meaning in the investment world. It is a measure of interest rate sensitivity in bond portfolios. You can calculate the duration for an individual bond or for a portfolio of individual bonds and you can derive an average duration. Why is this important? Because in a rising rate environment, like the one we are just entering, the duration will give you an idea of how much your principle will decline for a given increase in interest rates.
If your bond portfolio or your bond fund has an average duration of 6 years then you can expect the value of the portfolio to drop by about 6% for every 1% increase in interest rates. The Pimco Total Return Bond Fund with assets of around $246 billion dollars is one of the largest bond mutual funds in the United States. With an average duration of 5.26 years you could expect about a 5% drop in the funds value if interest rates rose by 1 percentage point. Or you could expect a 1.25% drop in value if interest rates rose by just 0.25%.
Given that most bond funds have a yield of around 3% you can see that even small changes in interest rates can wipe out months of dividend income. So you should be aware of the duration of any bonds or bond mutual funds you own.
Then ask yourself if the risk is worth the reward at this point