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Rethinking “Safe Investments” for the Long Term

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Rethinking “Safe Investments” for the Long Term


Are Treasury Bills “Safe” for the Long Term?

So far this year, more than 90 billion dollars has been withdrawn from stock funds while more than a trillion dollars has been deposited into money market funds.

Clearly, people are flooding out of anything perceived to be risky and moving into what they feel is safe.

In moments like these it’s important for us long term investors to remind ourselves that the goal of investing in the first place is to grow our purchasing power over the long term.

And often, achieving the success we want requires keeping our focus on the long term despite the chaos all around us in the short term.

Today, the 10-yr. US Treasury Bond is selling for a yield of just over 0.70%. In other words, lending money to the US government for the next ten years will earn you less than 1% in returns each year for a decade.

This while CPI inflation has been 1.6% per year for the last decade and right at 3% for the last 90 years or so. If inflation stays the same over the next ten years as it has been over the last 10 that bond investor would lose almost 1% of their purchasing power every single year.

And with the proposal for another $3 Trillion dollar stimulus package getting thrown around on top of a national debt already more than $25 Trillion I’d be surprised if we can keep inflation this low for that long.

Stock Dividends Alone Could Outperform the Current Treasury Yield

On the other hand, we long term investors can consider the stock market.

For what it is worth, I personally believe the stock market will be much higher 10 years from now. No one knows for sure, but it’s been very unusual historically for the stock market to be negative over a ten-year time frame.

Also, the coronavirus issue that sparked this bear market we’re in today is likely to be far in the rearview mirror. After all, the Spanish Flu, a hundred years ago, which was at least as contagious and far more deadly than the coronavirus lasted just 15 months.

But put all that to one side and imagine a scenario where the stock market is just flat for the next ten years. Again, that would be very rare historically but let’s imagine.

Even if the stock market didn’t grow for the next ten years, we would still be collecting the dividends. Today, the S&P 500 (large, US stocks) has a dividend of 1.97%. International stocks (the MSCI EAFE) have a dividend of almost 3%.

In other words, the global stock market has current income some 2.5 – 4 times higher than lending those same dollars to the US Government for ten years. Of course, dividends can be cut, and stocks aren’t appropriate for money you’ll need within the next 5-10 years.

But if we’re comparing investing in stocks vs. bonds over the next ten years and beyond, then investing long term money for the dividend along is better than we’re getting in bonds today. Plus, we get the kicker of whatever the largest, best financed, best managed companies in the world might do in the next ten years.

For long term investors focused on trying to grow the purchasing power of their money I believe a diversified portfolio of stocks is in a better position to do that than long term bonds today.

CUT THROUGH THE NOISE. LEARN WHAT REALLY MATTERS IN YOUR FINANCIAL LIFE.

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