Duration doesn’t sound important, but if you are a bond investor it is extremely helpful. A bond or bond portfolio duration will give you an idea of how the values will change based on changes in interest rates.
The longer the duration the more the value will increase or decrease depending on the direction interest rates move.
Like a seesaw, interest rates move in the opposite direction of bond values. Rising rates mean falling bond prices and falling rates mean rising bond prices. The shorter the duration the less impact interest rate moves will have.
So where are we today? Well, we have had an amazing bull market for over three decades and interest rates are likely to move up, at some point.
If you believe they will move up soon you should be shortening your duration and avoiding longer duration bonds. Just to give you an idea of what could happen, longer duration bonds could fall as much as 15% with a 1% increase in rates.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.