Nearly all commentators believe the bottom of the interest rate cycle has been reached and after that there will be only one way to go. Up.

When interest rates start rising, it means investors in fixed interest assets will start to suffer capital losses – something that they often think is impossible in this asset class.

While picking the time of the turnaround is impossible, the likelihood that it will happen is pretty certain.

This change in direction poses a major issue for advisers and investors alike because fixed interest plays an important part in a diversified portfolio (ie: most people need some).

Perhaps one good thing is that there are far more investment options today than were available when the bond market crashed in 1994. Among the options available are managed funds which embrace corporate debt offerings as well as sovereign ones, capital notes, debentures and now high yield funds which use collateralised debt obligations.

Countering this proliferation of products is the trend for people to take on greater risk (in search of higher returns) as interest rates come down.

The result is that billions of dollars have been flowing into capital note and debenture issues.

One of the messages that has become clear over the past few years is that people have moved up the risk curve to get better returns from fixed interest investments.

There is now a growing chorus of people who are warning of the risks of single issue investments and whether or not investors are being adequately rewarded for the risk they are taking on.

One of the most vocal critics has been a guardian of the New Zealand Superannuation Fund, Brian Gaynor.

He says one of the over-riding features of these issues is the low level of security offered to investor, which when coupled with poor diversification increases the risk.

His concerns have been echoed by other people in the industry who warn of a strong likelihood that at least one of these offers will fall over.

The message for advisers and investors is to remember 1994. When the market fell out of bed, people lost money. Don’t let it happen again.

Look for investment options which have good diversification, aren’t going to be hit by rising interest rates and have adequate security and reward.