Individual investors

Are bonds a good investment in a rising interest rate world? By Mike Ruff, Portfolio Manager, Global Fixed Portfolio Management Russell Investments May 2010 As interest rates fluctuate, you may be worried about the value of your bond investments. It's true that when interest rates go up, bond prices go down. But here's what you should really know: fixed income returns aren't driven solely by interest rate changes. So why then could it still make sense to include bonds in your portfolio? Consider all of the risks, such as the likelihood of default or that the market may be unwilling to pay the price you'd like when you choose to sell. Some bonds are more sensitive to changes in interest rates, including mortgage- backed securities. When rates fall, some homeowners refinance into a lower rate mortgage. This means they pay off their current mortgage early, resulting in a "pre-payment." The prepayment can be problematic for the mortgage investor because while they got their money back (a good thing), they now may need to think about finding another investment in the lower interest rate environment. The other end of the interest rate spectrum On the other side of the interest rate sensitivity spectrum, you'll find securities, such as high yield corporate bonds. Instead of being driven by interest rate changes, price changes of high yield bonds are more likely driven by events specific to the firm, such as losing a competitive position relative to a peer or weak financial results. Note that this type of bond has a higher risk of default than many other bonds. With this in mind, what can you do if you're thinking about bond investing? You could own securities less sensitive to interest rate changes. One possible strategy could be to own fewer mortgages or own mortgages that are less likely to "pre-pay" such as mortgages with an interest rate lower than current interest rates. Two plus two is always four so when rates increase, bond prices drop. But, keep in mind that active management seeks to add value regardless of the market environment. One of the ways active managers do this is by changing the interest rate sensitivity within their portfolios, depending on their view of not just the direction of the rate change, but also how quickly rates will change. As with all investments, it's important to have a mechanism to monitor them. To ensure that you're making a good decision for you, contact your financial, legal, or tax advisor for guidance before investing. Fund objectives, risks, charges and expenses should be carefully considered before investing. For a prospectus containing this and other important information call Russell at 1-866-676-7680 or go to the prospectus and reports page to download one. Please read the prospectus carefully before investing. These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse repurchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield ("junk") bonds or mortgage backed securities, especially mortgage backed securities with exposure to sub-prime mortgages. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries. The information, analysis, and opinions expressed herein are for general information only. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Please remember that all investments carry some level of risk including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. Diversification does not assure a profit or guarantee against loss in declining markets. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. The Russell logo is a trademark and service mark of Russell Investments. Copyright © Russell Investments 2010. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty. Securities products and services offered through Russell Financial Services, Inc., member FINRA, part of Russell Investments. For information on the Financial Industry Regulatory Authority, go to www.finra.org. First used: May2010. RFS 10-3354			How to invest with Russell   Weekly market updates Watch Market Week in Review   Also available Subscribe to our market insights RSS Learn more about RSS Printer friendly version of this page

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