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Tuesday, October 25, 2011

The Best Investment - Revisited

Source: durtcom
In August, I wrote a post about rear view mirror investing. At the time, investors were piling into bonds and precious metals and didn't like stocks.  I cited the following year-to-date returns at the time:

TLT (longer term U.S. Treasury exchange traded fund): +20.79%
GLD (gold exchange traded fund): +29.02%
INTC (intel common stock):  -6.03%

Back then, the 10-year Treasury note yield was 2.07%, the S&P 500 stood at  1123.53, and gold was $1,848/oz..

Today the yield on the 10-year Treasury note is 2.26%, the S&P 500 stands at 1254.19, and gold is priced at $1661.50/oz.

The returns on the aforementioned ETFs and Intel common stock since the August post have been:

TLT = 3.05% (helped by a drop in the yield on the 30-year bond from 3.39% to 3.27%)
GLD = -10.5% ( no dividends - ouch!!!!!)
INTC = +28.1% (this is without the dividend to be paid in November).

These particular investments are obviously very different with their associated risks and returns.  The return on most precious metals is driven by the fear factor.  Investing in precious metals when fear is running very high introduces the possibility of buying close to a peak.  The investor needs, in this instance, for fear to be maintained at a high level or even to ramp up.  As is well known, there is no dividend here - the investor is relying on a future buyer denanding the metal at a higher price.  There's no guard rail on the trampoline.

Also driven by fear, especially in today's markets, is the U.S. Treasury market - still considered the safest in the world despite downgrades and potential downgrades.  Investors continue piling into an issue that pays roughly 2% for the next 10 years.  At today's inflation rate, this is a negative real return.  With the global investment community on its knees begging Germany to print money, it is scary to contemplate where inflation could go several years down the road. 

Intel, on the other hand, pays a dividend yield of 3.50% which has the potential to increase over the next 10 years and has had exceptional earnings fueled by the apparently insatiable global demand for electronics products.  Investing in any single stock is risky, of course, and Intel is used here only as an example.

The bottom line is that rear view mirror investing, i.e. chasing the hot sector, can be costly.  Sometimes valuations get out of whack.  Perhaps a useful question is how wide would the spread have to be between the 10-year Treasury note and a particular dividend yielding stock to make the swap?

Disclosure:  I own Intel stock.  The purpose of this post is for educational purposes.  Investors should do their own research and consult with an advisor before investing.


  1. I'm not too enamored with 2% for the next ten years. I think after inflation and taxes 2% will be a losers in real terms. I'm looking for higher yields, even if I have to assume higher risk, and hope to at least achieve some positive real returns.

  2. Another reminder for proper asset allocation and regular rebalancing.

    Nice followup!

  3. I agree with @The Grouch 2% is seriously a loser after adjusting for inflation and taxes. Fortunately, there are more options!!!

  4. Great post Robert! And I second what MoneyCone said exactly...

    Or as the mutual fund industry so aptly coins it, in their infamous and ridiculous disclaimer: "Past performance is no idication of future performance...". Duh!

    Nice post,