Reinvestment Risk: Should you be worried?

If you invest in bonds, you are going to have to become familiar with reinvestment risk and how it can affect you. Bonds provide you with interest. When you receive this interest payment, the best thing to do is reinvest that money back into the market. Usually, you can compound your interest and earn a nice return over the long-term.

Reinvestment Risk

Reinvestment risk refers to the risk that you take on when you reinvest the money that you receive from coupon payments. Interest rates on bonds are volatile and they move up and down depending on the market. Therefore, if you got an interest payment from a bond that was paying a higher rate of interest, and you had to reinvest it when interest rates were low, this could negatively affect your portfolio. Investors have to take on reinvestment risk when they utilize the reinvestment strategy because it comes with the territory.

You can eliminate the impact of reinvestment risk if you simply do not put your money back into bonds immediately when you receive it. However, you will be giving up potential returns.

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