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Protecting Your Portfolio Against the Threat of Rising Rates


NEW YORK (TheStreet) -- In the wake of an absolutely stellar performance last year, thus far in 2014 we are hearing a lot about what's not working for investors, both professional and retail.

The major indices have had a rocky go of it, and the recent selloff in the Nasdaq momentum names including Netflix (NFLX), Tesla (TSLA) and Amazon (AMZN) has pulled the rug out from under many investors. But there are many investments that have been standing out the past few months -- some of which are getting adequate attention, some which aren't.

After last week's rout, all the major indices (Dow Jones Industrial Average, S&P 500 and Nasdaq) are in negative territory for 2014. Bonds are out-performing stocks for the first time since 2011. Almost exactly a year ago year Warren Buffett called bonds "a terrible investment." He is probably right over the intermediate term and almost certainly right over the long term, as the rewards for ownership are no longer remotely commensurate with the risks.

So what's an investor to do?

Below is a chart reflecting the year-to-date performance of three separate, interest-rate-sensitive asset classes: Utilities (represented by the iShares Dow Jones US Utilities (IDU)), Equity REITs (represented by Vanguard REIT ETF (VNQ)), and Master Limited Partnerships (represented by JPMorgan Alerian MLP Index ETN (AMJ)).

AMJ Chart
data by YCharts

While most headlines seem to be encouraging investors to protect their portfolios against the imminence of rising rates, there has been little gained by acting on that advice up to this point. In reality what we have seen is a continuance in the trend of rates moving lower, though not without some turbulence. The chart below shows that the 10-year Treasury remains solidly in a downward trend, despite all of the reasons why rates "should" be heading back towards more "normal" levels.

10 Year Treasury Rate Chart10 Year Treasury Rate data by YCharts

Is it possible that the next 50-basis point move in the 10-year Treasury is down, not up? Why not? And if so, what does that mean for the stock market and the asset classes mentioned above?

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