All You Need to Know Is In This One Little Chart
Study this chart carefully. It holds the key to your investment future. Interest rates peaked at 19.1% in January 1981. If you bought thirty year Treasury Bonds then and put them into your safe deposit box, you have earned 18 or 19% a year in interest payments on your original investment and beaten the very best hedge funds. In the meanwhile, your bonds also increased in value. It was a golden scenario and yet most of us were completely averse to buying bonds in 1981. Interest rates had been rising for years and everyone who had owned bonds had lost money. Only 20% of investors were bond bulls then. Most people wouldn’t go near them with a ten foot pole. Does that sound like your approach to stocks today?
For the last decade, investors have been slapped silly owning stocks. The S&P 500 provided a negative return from 2000 to 2009. Early in the decade we endured the bursting of the Tech Bubble. In one of the great stock market bubbles of all time, the NASDAQ rose to more than 5100 for a brief moment in early 2000 before falling to 1100 in October 2002, just two years later. The highest NASDAQ has been since then was 2800 in the fall of 2008; the lowest was 1268 in March 2009. It’s currently near 2200. In the latest rout, the so-called Great Recession, many blue chip stocks lost from 50-90% of their value. Think GE, Citicorp, American Express, DuPont, and other Dow 30 stocks. That is not to mention those that filed for bankruptcy like GM and Chrysler, Lehman Brothers and too many others to mention. We’re human. We remember what most recently gave us pleasure or caused us pain.
Warren Buffett always advises to be greedy when others are fearful. Many people have lost their shirts and their homes along with their jobs. Three million homes are likely to be foreclosed this year. Small businesses are closing daily. You bet people are AFRAID.
As humans we are supposed to learn from our past mistakes. Even so, as investors our actions often defy logic. We regularly chase last year’s winners. We take recent events and extrapolate them into infinity. Like those caught up in the Tulip Bubble, or the South Sea Island Bubble, or the Tech Bubble or the Housing Bubble, we spot an easy way to make money quickly and we are more afraid we might miss out than that we will lose our money. So we pile in. At this moment, people are so frightened they are searching for the best approach to safeguard what remains of their money so the general perception is that bonds are a good idea.
Nothing could be further from the truth. For the last 30 years, bonds have had the wind at their back as interest rates fell lower and lower. The scenario works in the exact opposite direction when rates rise as they did in the late 1970’s. When rates rise, you lose money owning bonds. It’s as simple as that. And once rates are at zero, the only possible directional change is up. The only question now is WHEN?
PLEASE LISTEN UP! The pendulum is about to swing in the opposite direction in a very nasty way. When the FED feels that it can safely raise rates and stop flooding the economy with money, rates will rise and the value of any bonds you hold will fall. Your only hope is to hold them to maturity but if inflation returns, you will get back dollars at the end that are worth far less than the dollars you are using now to buy those bonds. Those who had something left after the stock market collapse will realize they have run from the frying pan filled with grease directly into the fire.
What’s an Investor to Do?
Don’t be lulled into a false sense of security that bonds are a safe investment. With mind boggling U.S. budget deficits looming over our economy, our country has tough choices to make. Huge interest payments on the debt will sap money that could be spent on infrastructure, education and staying globally competitive. Many think they should take their money outside the U.S. to more rapidly growing countries. China is experiencing rapid growth but also a real estate bubble of epic proportions. India is growing rapidly as are Brazil and Russia. Those latter two are rich in energy and enjoying the fruits of that. If the U.S. continues to find huge reserves in the Gulf of Mexico, truly embraces solar power, wind power and nuclear solutions, that advantage will be short lived in the long sweep in the history of nations.
Don’t count the U.S. out! We are suffering from a serious lack of leadership in Washington. Eventually that vacuum will be filled at both ends of Pennsylvania Avenue. In the meantime, you should carefully consider a portfolio of blue chips stocks.
Quality companies are selling at a fraction of the prices they commanded two years ago. Emphasize those with considerable business outside the U.S., low debt, and dividends that exceed what you can get in a money market fund. Yes, there is volatility in owning stocks. If you are a patient long term investor, that volatility will be far less frightening than the money you will lose holding bonds as rates revert to more normal levels. Save more money than you think you will need. Let us help you so you will be pleasantly surprised with more than enough assets when the time comes to retire and start drawing down your reserves.