How To Protect Your Portfolio From Rising Interest Rates

How To Protect Your Portfolio From Rising Interest Rates

Posted On March 1, 2021 3:25 am

In recent weeks, concerns have risen about the government’s continuing stimulus plans. The possibility of overheating the economy has sent inflation expectations higher.

As a result, long-term interest rest rates have climbed very quickly, causing a minor stock market selloff in the process.

While the S&P 500 is just barely off its recent all-time highs, the Nasdaq has fallen almost 7%. That’s to be expected to some degree since high-growth stocks naturally trade at higher multiples. Therefore, they tend to be more rate-sensitive than slower-growing value stocks.

Of course, it’s a market of stocks, not a stock market. So some shares have fared worse than others, especially certain highly overvalued names.

Tesla (TSLA), for one, fell 31% in a matter of days. Other hype-positions tanked as much as 50% – in a single day!

So here are the three most important things to know to protect your portfolio from a rising long-term interest rate environment…

Fact 1: Just 3 Things Determine Stock Returns

In the short-term, almost all stock returns are a function of luck and sentiment.

And by “almost all,” I mean 92% of one-year results. That’s according to a JPMorgan study. Yet 90%-91% of 10-year returns and beyond are the work of fundamentals.

Starting yield, long-term growth, and valuation changes are the only things that ultimately determine how well your money is going to perform.

What this means is that, in the short-term, Wall Street is a casino. Almost anything can and will happen moment to moment.

But over a long-enough time period, the results are guaranteed by statistics, probability, and math that we can count on.

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About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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