Tempted to give up on stocks and flee for the hills? Don’t do that quite yet.
When you take a good hard look at investment options, you’ll see why we think stocks may still represent the best investment opportunity out there.
“For the first time since the financial crisis, stocks are earning more for investors than key long-term Treasury bonds,” observes CNBC.
What exactly does that mean?
You know that bonds are paying very, very little now, right?
The interest rate (or yield) on a 30-year Treasury bond has dropped to under 2% (1.96% to be exact). That’s right. Committing to a very long-term 30-year investment will earn you less than 2% per year, and that’s before taxes and inflation.
Once taxes and inflation are taken into account, your return is very likely to be negative. Don’t forget, some 16 trillion dollars of bonds worldwide are paying negative yields. Wrap your head around that. If you’re investing for income and long-term growth, and trying to pay bills that are constantly rising, I bet “negative yield” doesn’t sound very appealing.
So how about stocks? Stocks aren’t screaming “bargain” right now, but they’re also not at sky-high valuations compared to past history.
And guess what? Stock dividends are yielding more than the 30-year Treasury bond for the first time since the financial crisis. That’s why we say that, compared to bonds, they may be the more appealing investment.
The average dividend yield on stocks in the S&P 500 index (a representative cross-section of the 500 largest stocks in the U.S.) is slightly higher now than the yield on bonds, so you can actually earn more income on stocks than on high-quality bonds. That hasn’t happened in a long time.
Of course, stocks have more risk than bonds and can lose more value, especially in short-term market turbulence. That’s why almost every investor needs a mix of growth investments (like stocks) and more stable income investments (like bonds).
But don’t forget that bonds have risk too. At current prices, we see limited upside for most bonds, and lots of downside.
So yes, do include bonds in your portfolio (we do, as we pick through what’s available to select the best ones for our clients), but make sure to include investments with more upside, like stocks, as well. The relatively high stock dividend, compared to bonds, shows that stocks have more potential thanks to their growing dividends and growing prices, something that should definitely appeal to long-term investors.
The Takeaway: In times of market turbulence and inflammatory news headlines, it’s easy to follow the herd and lose sight of real opportunities and dangers in the market. Always make investment and portfolio decisions after weighing the potential investment upside and downside.
So before you give up on stocks, realize that they may offer more income and growth potential than bonds, which are currently paying close to the lowest level of income in modern history. Ouch!