This one’s easy enough — a longer-term investment usually pays a higher return, so it’s just the kind of investment you want. Picking a long-term investment is doubly attractive when interest rates later decline, because you’ve locked in a portion of your portfolio at that higher rate of return.
In the bond market, a yield curve is the indicator that most investors watch more than any other. Few indicators are as reliable as the yield curve, and it’s one of the best forecasting tools available. The yield curve isn’t as good as a crystal ball, but it’s a fairly good way to assess the short-term direction of interest rates.
At some point in the decision-making process, you pondered whether to go with a fixed or a variable interest rate. You may have looked at the recent history of mortgage rates and decided that rates were the lowest they had been in several years, so it was a good idea to “lock in” a fixed rate on your mortgage.
But there are some challenges that go along with holding longer-term securities:
Because of these kinds of challenges, financial officers choose to keep billions if not trillions of dollars of public funds heavily concentrated in investments of under a year, when longer-term investments would be better. These officers are taking the easy road, but in doing so, they’re avoiding diversification and most often losing out on a better return.
Communication is key. If everyone understands what the challenges are and why you’re investing the way you are, the authorities to whom you report are certainly much more likely to understand. Everyone wins when you are all on the same page.