3 Percent

Bill Parrott |

Three is not a lonely number but it is a crowd and a bit odd.  The number three appears in stories like the Three Musketeers and the Three Little Pigs. The Nina, Pinta, and Santa Maria sailed the ocean blue as a threesome.  Famous athletes who have worn the number include Babe Ruth, Dwayne Wade, Candice Parker, Russell Wilson, and Dale Earnhardt.  Let’s not forget the Three Stooges.

Lately, investors have been agitated because the yield on the 10-Year US Treasury Note breached 3%.  Rising rates usually don’t bode well for financial instruments like stocks or bonds but should we be worried?

The last time the 10-Year yield poked its head above 3% was December 2013.  If you purchased the Vanguard S&P 500 Index fund in January 2014, after the 10-Year rose above 3%, you would’ve generated an average annual return of 10.89%.  A $100,000 investment in the Vanguard fund is now worth $155,510.

The yield on the 10-Year Treasury never fell below 3% from 1962 to 2008 and peaked at 15.84% in September 1981. Since 1962 it has averaged 6.23%. Rates are relative and 3% seems low next to the historical average but high when compared to the low of 1.37% it touched in July 2016.[1]

From 1962 to 1981 the 10-Year yield soared 275%.  This period included the Cuban Missile Crisis, the Civil Rights Movement, the Vietnam War and the Iran Hostage Crisis. Despite these headwinds the stock market managed to generate an average annual return of 6.8%.  A $100,000 investment in the Investment Company of America mutual fund in 1962 grew to $547,780 by the end of 1981. Of course, the stock market didn’t go straight up, it fell several times including a 41% loss from 1973 to 1974.[2]

The S&P 500 Index has averaged 10.8% from 1962 to 2018 with interest rates rising and falling. Incorporating a buy and hold strategy in the index, a $100,000 investment in 1962 grew to $34.11 million at the end of March 2018.[3]

Should you be afraid of rising rates? It all depends on why rates are rising. Currently they’re rising for positive reasons because of our strong economy, low unemployment, and robust earnings.

To keep your investments moving forward here are three things you can do now.

Plan. A financial plan will help crystallize your goals and quantify your objectives. It will serve as the cornerstone for your investment portfolio and help guide your through a myriad of market conditions.

Invest. A diversified portfolio of stocks, bonds and cash will help cushion your investments from a rate shock.  Adding international and alternative investments to your account will further balance your portfolio.

Repeat. Rebalancing your accounts once or twice per year will keep your asset allocation intact and your risk level in your desired range.

The American economy continues to thrive, and the long-term trend of the stock market can move higher despite the gravitational pull of interest rates.  Focus on your goals, look to the horizon, and invest often.

“We ignore outlooks and forecasts… we’re lousy at it and we admit it … everyone else is lousy too, but most people won’t admit it.” ~ Marty Whitman


April 25, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.  The returns don’t include taxes.



[1] https://fred.stlouisfed.org/series/DGS10

[2] Morningstar Office Hypothetical Tool

[3] Ibid