Dividend Sensei

How To Protect Your Portfolio From Rising Interest Rates

Adam Galas

13 postsFebruary 27, 2021

In recent weeks, concerns have risen about 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.

Fact 2: Rising Rates ARE NOT Historically Bad for Stock Returns

The “there is no alternative” (TINA) theory of investing goes like this…

If interest rates are low enough, then any valuation is justified for stocks since everyone will be buying, guaranteeing that prices go up. Conversely, if rates go up, more people will sell stocks to buy bonds and stocks will do poorly.

There are two major flaws in this particular TINA mentality though, which is why it’s usually incorrect. The first is that interest rates are constantly changing based on the bond market’s long-term economic and inflation expectations.

Besides, the average 10-year yield in the 2010s was 2.4%. And the blue-chip economist consensus in the 2020s is for 2%-3%.

The 0.5% yields seen in 2020 were something NO ONE expected to continue forever. Therefore, no prudent long-term investor was paying elevated multiples based on the TINA hypothesis.

Only speculators were.

The other major flaw is that this mentality only focuses on valuations, which tend to cancel out over time. In other words, the two most important fundamentals that drive almost all returns over time are starting yield and long-term growth.

This explains why rising interest rates tend to actually be good for investors.

(Source: Ben Carlson)

In the modern era, primarily the last 25 years, all stocks have done well in rising long-term rate environments. Growth, value, small, large… It didn’t matter. They went up as rates rose regardless.

A study from JPMorgan found that, from 1963 through 2019, stocks generally went up as long as 10-year yields were under 5%. And Goldman Sachs’ head of quantitative research finds that the rate of interest rate is more important than the actual rate itself.

More specifically, 37+ basis points per month is the tipping point strongly correlated with short-term corrections. Even so-called “bond alternatives” like REITs aren’t hurt by rising long-term rates.

From 1972 to 2018, the percentage of REIT total returns explained by 10-year yields was just 2%. So even if you had been able to predict interest rates with perfect precision, you still wouldn’t have been able to figure out REIT returns.

If you’re still left wondering how stocks can not be hurt by rising long-term rates, I get it. But stocks and bonds are nothing alike other than being income-producing assets.

Bond values are 100% a function of credit quality and long-term interest rates.

Long-term stock values, however, are 100% a function of future cash flows, which are only modestly affected by long-term interest rates. Stock multiples in the short-term can be affected, but rising long-term rates don’t hurt strong companies’ fundamentals.

Besides, interest rates tend to rise when the bond market becomes bullish on the economy.

For proof of that, look at the 1990s, which saw 10-year yields as high as 7%… and the strongest bull market in U.S. history at the same exact time. They fall when economic growth and inflation are expected to be low.

A thriving economy is good for earnings, cash flows, and dividends. Those factors are the only determinants of stock intrinsic value – which prices always eventually return to.

This is why rising rates tend to be correlated with rising stocks.

A decade of low rates has incorrectly taught many investors to focus only on interest rates and earnings multiples. But again – and I cannot stress this enough – fundamentals are 11x as strong a factor over time

Bottom Line: Prudent Long-Term Investors Never Have to Worry About Interest Rates

Day traders buying Tesla at $900 – which is almost 200% overvalued – absolutely have to worry about rising long-term interest rates bursting that bubble.

Prudent long-term investors, buying undervalued tech blue-chips like Amazon (AMZN) – which is 30% undervalued – do not.

I can’t tell you what the price of any stock will do in the short-term. No one can. Nor can I promise you that buying Amazon at a 30% discount will guarantee instant profits.

What I can tell you is that its historical corrections tend to bottom at 30%-50% discounts to fair value… that 40%-50% discounts only occur during recessionary bear market lows… and that we’re likely to see the strongest economy in decades in 2021 and 2022.

What I can tell you is what’s likely in the next two years. Like how some economists are expecting 6% growth in 2021 and 5% in 2022. And how FactSet is expecting three consecutive years of double-digit earnings growth.

For quality blue-chips bought at reasonable to attractive valuations, 2021 and 2022 is likely to be a boom-time we’ll never forget.

This is why I remain fully invested, trusting my diversified and prudently risk-managed bunker retirement portfolios to ride out any short-term hiccups in the market.

In fact, I’m using the recent tech correction to buy the highest-quality tech and dividend stocks with the intention of locking in incredible yields and total returns over time.

Happy Investing

Adam Galas

13 posts

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Adam Galas is a retired Army Medical Services Officer with an economics degree from the University of Minnesota who combines his 23 years of investing experience with a disciplined application of time-tested methods. Adam is holding or has held positions as a professional analyst at The Motley Fool, Seeking Alpha, and Simply Safe Dividends. His work has also appeared on thestreet.com, Forbes and Stocknews.com.

Due to his love of Buffett-style investing in safe, undervalued, dividend growth stocks, Tipranks recently ranked him Americas 43rd best analyst. And he is the second-most followed writer on Seeking Alpha, where as he is also a co-founder of Dividend Kings.

Thanks to a love of Buffett-style investing in safe, undervalued, dividend growth stocks, he was recently ranked the 43rd best analyst in the country by Tipranks and is the second-most followed writer on Seeking Alpha.

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

How To Protect Your Portfolio From Rising Interest Rates

Adam Galas

13 postsFebruary 27, 2021

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How To Protect Your Portfolio From Rising Interest Rates

13 postsFebruary 27, 2021

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