My Comments: This is an example of how headlines and breathless remarks from TV people can be misleading. Who exactly is the writer talking to? Are you in his target audience or is he just trolling for anyone?
I don’t have a clue if the writer is technically competent to make that statement or not. He may be far more competent than I am. He goes on to say that “if you want a 95% probability of stocks outperforming bonds, you’d better plan on 20 years”. If he’s talking to me, I suspect I’ll long past my “use by” date in 20 years. So how am I supposed to interpret this?
As mentioned my theme this week is to explore ideas about putting some of your uninvested cash back into the market. If you’re investing money for your future retirement, perhaps at least 20 years away, it’s unrealistic to expect bonds to outperform stocks over that time frame.
Why? Interest rates are historically low right, some approaching negative values? Bonds are historically the investment of choice if you’re a conservative investor. That’s often because the interest they pay to justify your buying them is first measured by their safety, ie the reliability of the issuing agency being there to pay back principal to bond holders. In this country, it would be bonds issued by the US Treasury.
But with low interest rates in general right now, the odds of rates increasing over the next 20 years, what’s known as a reversion to the mean, is high. When that happens, the bonds going around today will become less valuable. Why is that?
Because if you have money to invest and decide to purchase bonds, you’re going to buy those with best return on investment for the given amount of risk you’re willing to accept. How likely will the bond issuer still be around to return your principal 20 years from now, or at any point in the interim?
If your choice is a bond issued by the Treasury that pays 3% per year, or one issued in say, 2029 that pays 4%, which one are you going to favor? You’re going to favor the 4% bond, and the price of the 3% bond is going to drop so that the yield is equivalent to 4%. What has now happened to the value of the bond you own that’s paying 3%? You’ve just lost money is you have to sell it in order to pay your bills in retirement.
I’m not telling you to avoid investing in bonds. You need them for a properly diversified investment portfolio. What I am telling you is that if you’re reading the article by Mark Hulbert that appeared yesterday, May 19, 2020, you need to understand some of the variables going in.
I teach retirement planning. I’ve written books about it. The dynamics of retirement and your ability to manage them as they apply to you suggest you need time, energy and discipline if you expect to have a successful retirement. I encourage you to click on the link to the article in question and not accept it as gospel. As much as it appears to be impressive, it’s there to help the sponsor present ads that generate revenue for itself.
And another quick thought. The global pandemic is going to significantly change the landscape we live in. Industries are going to fail, industries are going to succeed, new technology will emerge, old priorities will fall by the wayside. It makes no sense to me right now to make decisions based on something that might be there 10 years from now, much less 20.