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.