The Wall Street Journal recently published a very timely article about the current investment climate. Here’s the link in case you missed it: “Retro Investing – Look Back to Get Ahead.” As the title implies, the author suggests that history can offer important lessons to help us chart an investment path forward. I agree.
In a real sense, we are now in a “postwar” period. In the late 1940s, the US government labored under the massive debt accumulated during World War II. Today the government has a similar debt burden because of the 2008 financial crisis. As it did after World War II, the Fed is again keeping interest rates extremely low to help the government finance its huge debt. Savers are paying a price. They are being penalized through low rates on CDs, savings accounts and bonds.
We can expect interest rates to remain low for the foreseeable future. The Fed kept interest rates capped at a low level from the end of World War II through 1951, and there is no sign that it will behave any differently in the aftermath of 2008. This means that bonds likely will continue to produce low yields for some time to come.
Bonds values can erode when yields are suppressed by the government. According to the article, right now the real yield on long-term U.S. Treasuries is a negative 0.6% (after inflation). The prospect that this will continue or get worse is the real risk of bonds.
Mr. Lauricella makes the excellent point that when bond prices and yields are suppressed for a prolonged period and economic growth is sluggish, high-yield dividend equities can become an important element in even a conservative portfolio. Throughout the 1940s and 1950s, solid dividend stocks provided the best returns for investors.