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Investors concerned about the prospect of future interest rate hikes by the Federal Reserve may find it beneficial to review the historical performance of balanced portfolios during previous periods of rising interest rates.
The following tables consolidate the performance of two proxy portfolios (Total Bond Market, Balanced Portfolio) during historical periods of rising rates.
In each of the periods evaluated, balanced portfolios decisively outperformed a bond market portfolio as measured by total return (CAGR), risk-adjusted return (Sharpe Ratio) and downside protection (Sortino).
October 1986 to February 1989.
Over the 29-month period the effective Fed Funds rate increased 388 bps from 5.99% to 9.87%. A nearly 12% CAGR for equities meant balanced portfolio outperformed by 280 bps.
| October 1986-February 1989 |
CAGR |
Standard Deviation |
Max. Drawdown |
Sharpe Ratio |
Sortino Ratio |
| Balanced Portfolio |
7.02% |
7.69% |
-8.09% |
0.09 |
0.14 |
| Total Bond Market |
4.18% |
5.48% |
-5.86% |
-0.39 |
-0.52 |
December 1992 to April 1995.
Over the 29-month period the effective Fed Funds rate increased 289 bps from 3.17% to 6.06%.
| December 1992 – April 1995 |
CAGR |
Standard Deviation |
Max. Drawdown |
Sharpe Ratio |
Sortino Ratio |
| Balanced Portfolio |
7.34% |
4.87% |
-5.47% |
0.70 |
1.02 |
| Total Bond Market |
5.97% |
4.07% |
-5.01% |
0.51 |
0.75 |
January 1999 to September 2000.
A 21-month period that saw the effective Fed Funds rate increase 253 bps from 4.07% to 6.60%
| January 1999 – September 2000 |
CAGR |
Standard Deviation |
Max. Drawdown |
Sharpe Ratio |
Sortino Ratio |
| Balanced Portfolio |
5.87% |
5.69% |
-2.17% |
0.13 |
0.20 |
| Total Bond Market |
3.56% |
3.20% |
-2.64% |
-0.50 |
-0.64 |
June 2004 – August 2006.
A 27-month period when the effective Fed Funds rate increased 429 bps from 1.02% to 5.31%.
| June 2004 – August 2006 |
CAGR |
Standard Deviation |
Max. Drawdown |
Sharpe Ratio |
Sortino Ratio |
| Balanced Portfolio |
5.54% |
2.82% |
-1.60% |
0.79 |
1.35 |
| Total Bond Market |
4.06% |
3.05% |
-1.90% |
0.28 |
0.42 |
Investors are best served by remaining focused on the long-term and relying upon diversified portfolios to maximize risk-adjusted returns. Despite the periods of rising rates illustrated above, the 239-month period beginning in October 1986 and ending in August 2006 (nearly 20-years) saw a balanced portfolio produce superior risk-adjusted returns compared to either a 100% bond or 100% stock portfolio.
| October 1986 – August 2006 |
CAGR |
Standard Deviation |
Max. Drawdown |
Sharpe Ratio |
Sortino Ratio |
| Large Cap US Equity |
11.34% |
15.0% |
-44.82% |
0.49 |
0.71 |
| Balanced Portfolio |
8.56% |
5.6% |
-8.09% |
0.69 |
1.09 |
| Total Bond Market |
7.01% |
4.1% |
-5.86% |
0.58 |
0.88 |
