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In defense of 90-day Treasury bills

Imagine if all asset classes produce dismal returns over next decade.

  • By Mark Hulbert,
  • MarketWatch
  • – 11/20/2013
  • Investing in Bonds
  • Market Analysis
  • Treasury Bonds
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CHAPEL HILL, N.C. — What if T-bills are your best bet for performance over the next decade?

I'm sure you think I'm kidding. T-Bills currently are yielding just 0.075%, or just $7.50 for every $10,000. That's the best I can do?

Quite possibly.

Take the stock market, which is at all-time highs and already-rich valuations. What are the chances it will provide handsome returns over the next decade?

The indicator that has perhaps the best record at predicting 10-year returns is the infamous Shiller P/E, named for Yale University professor Robert Shiller, who just recently was awarded the Nobel prize in economics. The data below are from an article written by Cliff Asness of AQR Capital Management, based on data back to 1926.

Decile of Shiller P/E at beginning of 10-year period
Bottom of Shiller P/E range for this decile
High end of Shiller P/E range for this decile
Average S&P 500 real return over subsequent ten years
1 (stock market cheapest)
5.2
9.6
10.3%
2
9.6
10.8
10.4%
3
10.8
11.9
10.4%
4
11.9
13.8
9.1%
5
13.8
15.7
8.0%
6
15.7
17.3
5.6%
7
17.3
18.9
5.3%
8
18.9
21.1
3.9%
9 (where we are today)
21.1
25.1
0.9%
10 (stock market most expensive)
25.1
46.1
0.5%

The current Shiller P/E is 24.4, which puts the market in the 9th decile. On the assumption that the future is like the past, the market's expected real return over the next decade is just 0.9% annualized.

Of course, as stock market bulls like to remind us whenever these data are presented to them, the alternatives are hardly any better. All it will take for bonds to produce a loss in real terms over the next decade will be for interest rates to rise even modestly.

But this argument doesn't really support the conclusion the bulls draw. Just because the alternatives are awful doesn't mean the stock market is a good place in which to invest your money. T-Bills are not an unattractive option if you think stocks are overvalued and interest rates are about to rise and cause bonds to suffer.

For example, what if the period in U.S. history most analogous to where the financial markets are currently was the beginning of 1966? The accompanying table, from Ibbotson Associates, a division of Morningstar, shows what happened from then until the end of 1981, 16 years later.


Annualized total return 1966-1981 (nominal)
Annualized total return 1966-1981 (real)
S&P 500 (.SPX)
5.9%
-1.1%
Long-term Corporate Bonds
2.9%
-4.1%
Long-term Government Bonds
2.5%
-4.5%
Intermediate-term Government Bonds
5.8%
-1.2%
90-day Treasury bills
6.8%
-0.2%
Inflation
7.0%


Notice that over this 16-year period T-Bills provided the best inflation-adjusted return of either stocks or bonds.

What about gold? It produced a 15.4% annualized nominal return over the 1966-81 period, or 8.4% in real terms. But note carefully that gold's price was fixed at $35 an ounce until the early 1970s, just as it had been for many decades prior. So it's likely that a large portion of its huge gain in the latter half of the 1970s was caused by pent-up demand from earlier decades.

To be sure, researchers have found that gold is a decent inflation hedge over the very long term. But, as I argued in a column this summer, that long term has to be measured in many decades, even as long as a century. Over shorter periods of up to a decade or two, gold has a poor record as an inflation hedge.

T-Bills may not be exciting, but they do have two things going for them. They don't fluctuate very much in value, so their returns are assured. And their yield rises more or less in lockstep with inflation.

We can all hope that we can do better than merely keep up with inflation over the next decade. But, I shouldn't need to remind you, hope is not a strategy.

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Copyright © 2013 Dow Jones & Company, Inc. All Rights Reserved.
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Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
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