Higher rates have made headlines lately. For investors they can be a welcome change.
The 10-year Treasury yield, a key benchmark for interest rates, reached 5% in September, its highest level since 2007. Steady economic growth, higher energy and food prices, the Federal Reserve’s rate increase, and government borrowing have all played a role. For investors, this creates an opportunity. Cash set aside for near-term needs can now earn the highest rates in nearly two decades. As bonds in portfolios mature, we can reinvest the proceeds at these higher rates.
Stocks on the other hand have historically provided a higher return and are best suited to long-term goals, where time can help smooth out the market’s ups and downs. Bonds provide stability to the portfolio. In portfolios containing both equities and bonds, we build a “ladder” of high-quality bonds that mature overtime, all within ten years to maturity. That steady stream of cash now can be reinvested at prevailing rates, or used for withdrawals if needed. This avoids having to sell stocks at inconvenient times, which also helps manage capital-gains tax liability.
In our balanced portfolios, for example, we might hold 70% in stocks of large U.S. companies, 25% in high-quality bonds maturing over the next several years, and 5% in cash. Stocks drive long-term growth, while bonds and cash provide stability, income, and money for nearer-term needs. Depending on your goals, we may broaden diversification further by adding small and mid-sized companies and international stocks, so results depend less on any single market.
As we enter the fourth quarter, many uncertainties remain, including the outlook for interest rates, the impact of AI, geopolitics, and midterm elections. In equity portfolios, we will continue to focus on quality businesses at reasonable prices within a well-diversified portfolio, pursuing attractive long-term returns while managing risk. Today’s environment offers something investors haven’t had in years, a chance to earn significant income on high-quality bonds and U.S. government securities. We believe that disciplined investing remains the best foundation for whatever the coming quarters bring.
Thank you for your continued trust.
