What Higher Interest Rates Mean for Your Long-Term Plan

In the third quarter, the 10-year U.S. Treasury yield—the market’s benchmark interest rate—rose 0.85% to close at 5.29%. As shown below, this is its highest level in 24 years, though it remains below its long-term average of 5.80%. ¹

A bond yield consists of two components: the real yield plus expected inflation. The real yield reflects the supply and demand dynamics between lenders and borrowers before accounting for inflation. Treasury Inflation-Protected Securities (TIPS) track this real rate. During the quarter, the 10-year TIPS yield rose 0.73% to 2.93%, showing that real yields drove most of the increase in borrowing costs. The remaining 0.12% rise reflects a modest increase in 10-year inflation expectations.

This rise in real borrowing costs for the U.S. government could mark the start of a reckoning over the $40 trillion national debt, a temporary blip, or something in between. We simply cannot predict it. But should this uncertainty concern stock investors? 

Admittedly, I am colored by my experience as a financial professional, which predominantly includes the current millennium, which has been punctuated by at least seven turmoils in the U.S. stock market: ²

That is seven bear markets (drops of 20%+ in the S&P 500) over 26.75 years—roughly one every four years. On average, equities lost a third of their value during these downturns, with the first two erasing over half of the stock market’s value; the Global Financial Crisis marked the sharpest drop since the Great Depression. I won’t drag us through the difficult memory of each of these, though there is certainly a time and place for that. 

Yet despite these declines, ownership in the 500 largest U.S. companies generated an annualized average return of 8.32% over this period .³ For long-term horizons, I remain confident in equities' ability to build wealth and meet financial goals.

The shorter term is where planning becomes essential. How do we define "short term" versus "long term"? It comes down to individual risk tolerance and determining how many years of market declines a portfolio should protect against. 

When markets fall sharply, our primary goal is to avoid selling equities at depressed prices to fund withdrawals. Because market downturns vary in length, we plan around the duration of a drop rather than its depth. While history cannot predict the future, it provides a practical baseline.

Every individual investor, with their unique risk tolerance, decides for themselves what the short term and long term is by deciding how many years of withdrawals they want to insulate using bonds. There is no right answer except the one that suits the individual investor, ideally counseled by an advisor on the trade-off: greater downside protection means holding more bonds, which lowers expected long-term growth from stocks.

Historically, recovery times vary significantly. Following the COVID-19 shock, the S&P 500 regained its prior high in roughly six months (including dividends); after the Global Financial Crisis, recovery took 4.5 years. On average, full recovery takes two to three years, which serves as our minimum recommendation for portfolio protection. Investors seeking greater safety may plan for a five-year recovery window. This framework empowers clients with an objective criterion to balance a risk management timeline against growth.

Rising interest rate environments introduce a nuance: bond prices drop as yields rise, meaning bonds can decline alongside stocks. Higher yields benefit bond investors over time, but selling recently devalued bonds could be suboptimal. 

This is where thoughtful bond portfolio construction matters. By staggering or laddering bond maturities, we manage this risk: 

A well-crafted wealth management plan relies on sound financial structure. Your Quantum advisor is always available to walk through as much—or as little—of the underlying details as you care to know!