29 Jun 12% Six Years, 2.4% Thirty Years
Thirtytwo years ago I started my investment career with Dean Witter Reynolds in Las Colinas. At that time, you could double your money in risk-free US Treasury bonds, paying 12% in approximately six years. Today, that same risk-free US Treasury bond is paying less than 2.4% and it will take you more than thirty years to double your money.
As you can imagine, back then there were not a lot of reasons to own stocks. Fast forward to today and we have virtually the opposite scenario! Stocks, thanks to record low-interest rates, appear to be the only game in town. What makes this choice so difficult is that not only is the market near record valuations but the ‘baby boom’ generation has already experienced two near 50% stock market declines in the past fifteen years.
Hold on, this just in!
We can now add the decision by the United Kingdom to exit the European Union alongside negative interest rates to our list of unknowns. Honestly, no-one really knows how all this is going to play out.
So what do you do?
Well, you can close your eyes and ears and buy a stock or bond fund and hope everything works out or you can purchase the bargains created by such uncertainties. For example, take the financial stocks such as AIG, Bank of America, Citigroup or Goldman Sachs. They are being priced as if interest rates will never rise, legal issues will never decline, pricing will never firm, trading revenues will never improve or loans will deteriorate significantly. Maybe all of these things happen and the market is correct, or more likely over the next few years their outlooks will improve, net worths will increase and their prices will move higher.
In a world where central bank intervention does not exactly inspire confidence, I believe with some patience and discipline there will be enough opportunities for the risk-averse investor to earn a satisfactory rate of return. You never know, you might even be able to earn a little interest one day!