The economy appears to be recovering so the Federal Reserve may increase short-term interest rates. Long-term rates also may rise if an improving economy stirs fears of inflation. With interest rates likely to rise, you probably should place more emphasis on cash and short-term bonds. One technique: build a bond ladder.
Hold one third of your bond portfolio in one-year bonds, another third in three-year bonds, and the rest in five-year bonds. You’ll have excellent liquidity and scant risk of losing principal.
As your bonds mature, you can reinvest at five-year maturities, keeping your ladder in place.
If rates fall, you’ll have locked in today’s high rates.
If rates rise, you’ll be reinvesting at higher yields.
