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m_d_hI typed the words "safest investment" into the search engine, and the first result told me that "US Treasury bonds are widely considered the safest investments on earth."
Yet, earlier this year I shorted US Treasuries and made 12% on my trade in a matter of weeks. Vanguard's Extended Duration Treasury ETF is down 15% so far this year. How could "the safest investments on earth" decline in value so precipitously?
At this moment, 30 countries can borrow more cheaply than the US government can. Even relatively poor or tiny countries, like Bulgaria or Malta. Malta! The 10th smallest country by area, with only half a million people, can borrow more cheaply than the US government can. Does this mean the safest investment on earth is actually a Maltese treasury bond?
If you listen to the bond market, instead of your search engine, the safest investments on earth are German treasury bonds, which currently pay the lowest interest rate on the planet: -0.314%. That's a minus sign. Germany doesn't pay interest. You pay Germany for the privilege of "lending" your cash to Germany and hoping to get it back someday. It's like a German bond is a safety deposit box in which you are storing your cash for an annual fee of 0.3%. The comparable US interest rate is +1.566% right now.
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Another widely held belief about investing is that "over the long run, stock prices always go up". This is a bedrock principle of most people's retirement funds, for those of us who are affluent enough to have retirement funds, which is roughly half of the working adults in the US.
Although 401(k) and IRA accounts are "self-directed" investments, unlike pension plans, the typical advice given to people with these accounts is to put all of their savings into a retirement-date target fund. If you don't do that, the standard advice is to balance your savings between a stock index fund and a bond index fund, with the proportion in each depending on how far away your retirement date is.
To summarize, everybody is told to invest in stocks for retirement, and the justification for this is usually terribly oversimplified: "over the long run, stock prices always go up". Do you need to know what a stock is, or how it should be valued? Nope, just trust that "over the long run, stock prices always go up".
Blatant fact -- $1 invested in a US stock market index fund in 1970 would have grown to $40 today (before taxes and fees). So if you're 25 years old and starting your professional career, you're told to put practically all of your retirement savings into stock index funds. Because every $1 you put into stocks now will turn into $40 when you retire! And you don't have to worry about the ups and downs in the stock market between 2021 and 2065, just keep on investing 10% of each paycheck from now until then, and you'll retire a happy camper.
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We aren't supposed to ask why stock prices went up so fucking much between 1970 and 2021. We're just supposed to trust that stock prices will keep performing this amazing feat forever, going up 40x every 51 years.
But what happens if we look farther into the past, at some different time periods? Or, what happens if we look at some major countries other than the US?
The earliest data I have for the S&P 500 goes back to 1871, when the predecessor of that index was valued at 4.41. 51 years later, in 1922, the index was valued at 7.30. Wait, stock prices didn't even double over 51 years? During those 51 years stock prices increased by an average of 1.0% per year. You can do better than that now by buying 30-year US Treasury bonds, which are currently yielding 2.3%
If you invested in stocks in 1929 -- when stocks were cheaper than they are today, when compared to their underlying earnings -- it took you 30 years just to double your money. And you were underwater for the first 24 years after 1929.
Compared to underlying earnings, stocks are more expensive today than they were in 1929.
WTF happened to stocks that turned them into such scorching hot investments between 1970 and today?
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I should also point out, for completion's sake, that in some countries investing in stocks led you into irretrievable disaster. If you were a stock investor in Germany or Japan prior to 1945, or Russia prior to 1917, you lost fucking everything. In the case of Germany or Japan, they were literally destroyed by the Allies. In the case of Russia, the Communists seized all the property. The US is not immune to war or revolution, we're all humans here, like everybody else.
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Isn't it possible that the period between 1970 and today in the US is something unique, something that cannot be replicated over the next 51 years? Isn't it possible that, with stocks more highly valued today than they were in 1929, that we could see stock prices stagnate over the next 51 years instead of going up 40x? Or maybe we could see stock prices lower in 2072 than they are today. Maybe the people who invest in US stocks today could lose fucking everything, like the people who invested in Germany, Japan, or Russia during dangerous periods in the 20th Century.
Why did stocks go up so much over the past 50 years in the US?
Part of it was inflation, part of it was economic growth, part of it was valuing earnings more highly, part of it was lower tax rates on corporate income, part of it was lower interest rates on corporate debt, part of it was stagnant wages for corporate staff. If each of these factors accounted for 2x, then together they can multiply to 40x.
But some of these factors could reverse! Maybe the economy won't grow as quickly, maybe tax rates will go up, maybe interest rates will go up, maybe workers will organize and insist on higher wages.
The past 50 years were a Golden Age for stockowners that did not occur in other times and places. I would not "trust" that the next 50 years will look the same, if I were you.
It used to be considered wisdom to say, "What goes up, must come down." Do you really want to trust instead that something will always go up?
Yet, earlier this year I shorted US Treasuries and made 12% on my trade in a matter of weeks. Vanguard's Extended Duration Treasury ETF is down 15% so far this year. How could "the safest investments on earth" decline in value so precipitously?
At this moment, 30 countries can borrow more cheaply than the US government can. Even relatively poor or tiny countries, like Bulgaria or Malta. Malta! The 10th smallest country by area, with only half a million people, can borrow more cheaply than the US government can. Does this mean the safest investment on earth is actually a Maltese treasury bond?
If you listen to the bond market, instead of your search engine, the safest investments on earth are German treasury bonds, which currently pay the lowest interest rate on the planet: -0.314%. That's a minus sign. Germany doesn't pay interest. You pay Germany for the privilege of "lending" your cash to Germany and hoping to get it back someday. It's like a German bond is a safety deposit box in which you are storing your cash for an annual fee of 0.3%. The comparable US interest rate is +1.566% right now.
-----
Another widely held belief about investing is that "over the long run, stock prices always go up". This is a bedrock principle of most people's retirement funds, for those of us who are affluent enough to have retirement funds, which is roughly half of the working adults in the US.
Although 401(k) and IRA accounts are "self-directed" investments, unlike pension plans, the typical advice given to people with these accounts is to put all of their savings into a retirement-date target fund. If you don't do that, the standard advice is to balance your savings between a stock index fund and a bond index fund, with the proportion in each depending on how far away your retirement date is.
To summarize, everybody is told to invest in stocks for retirement, and the justification for this is usually terribly oversimplified: "over the long run, stock prices always go up". Do you need to know what a stock is, or how it should be valued? Nope, just trust that "over the long run, stock prices always go up".
Blatant fact -- $1 invested in a US stock market index fund in 1970 would have grown to $40 today (before taxes and fees). So if you're 25 years old and starting your professional career, you're told to put practically all of your retirement savings into stock index funds. Because every $1 you put into stocks now will turn into $40 when you retire! And you don't have to worry about the ups and downs in the stock market between 2021 and 2065, just keep on investing 10% of each paycheck from now until then, and you'll retire a happy camper.
-----
We aren't supposed to ask why stock prices went up so fucking much between 1970 and 2021. We're just supposed to trust that stock prices will keep performing this amazing feat forever, going up 40x every 51 years.
But what happens if we look farther into the past, at some different time periods? Or, what happens if we look at some major countries other than the US?
The earliest data I have for the S&P 500 goes back to 1871, when the predecessor of that index was valued at 4.41. 51 years later, in 1922, the index was valued at 7.30. Wait, stock prices didn't even double over 51 years? During those 51 years stock prices increased by an average of 1.0% per year. You can do better than that now by buying 30-year US Treasury bonds, which are currently yielding 2.3%
If you invested in stocks in 1929 -- when stocks were cheaper than they are today, when compared to their underlying earnings -- it took you 30 years just to double your money. And you were underwater for the first 24 years after 1929.
Compared to underlying earnings, stocks are more expensive today than they were in 1929.
WTF happened to stocks that turned them into such scorching hot investments between 1970 and today?
-----
I should also point out, for completion's sake, that in some countries investing in stocks led you into irretrievable disaster. If you were a stock investor in Germany or Japan prior to 1945, or Russia prior to 1917, you lost fucking everything. In the case of Germany or Japan, they were literally destroyed by the Allies. In the case of Russia, the Communists seized all the property. The US is not immune to war or revolution, we're all humans here, like everybody else.
-----
Isn't it possible that the period between 1970 and today in the US is something unique, something that cannot be replicated over the next 51 years? Isn't it possible that, with stocks more highly valued today than they were in 1929, that we could see stock prices stagnate over the next 51 years instead of going up 40x? Or maybe we could see stock prices lower in 2072 than they are today. Maybe the people who invest in US stocks today could lose fucking everything, like the people who invested in Germany, Japan, or Russia during dangerous periods in the 20th Century.
Why did stocks go up so much over the past 50 years in the US?
Part of it was inflation, part of it was economic growth, part of it was valuing earnings more highly, part of it was lower tax rates on corporate income, part of it was lower interest rates on corporate debt, part of it was stagnant wages for corporate staff. If each of these factors accounted for 2x, then together they can multiply to 40x.
But some of these factors could reverse! Maybe the economy won't grow as quickly, maybe tax rates will go up, maybe interest rates will go up, maybe workers will organize and insist on higher wages.
The past 50 years were a Golden Age for stockowners that did not occur in other times and places. I would not "trust" that the next 50 years will look the same, if I were you.
It used to be considered wisdom to say, "What goes up, must come down." Do you really want to trust instead that something will always go up?