How Long is a Person Beautiful?
Let’s start by saying something to help you get the right idea about how to choose an investment. If you have been around for fifty years or more, you look in the mirror and see a face dramatically different from the one you saw thirty years ago. Your handsome face or beautiful complexion are fading. Cosmetics, dietary changes, and disciplines, and even exercise might allow you to delay the inevitable changes. You may have been handsome or beautiful, but that is no longer as obvious as it once was.
The scriptures have something to say about real beauty that lasts. My wife has this type of lasting beauty. Actually, she still is beautiful on the outside too, but the inner beauty is what really makes her outer beauty so much better. The Apostle Peter wisely said, “Do not let your adorning be external—the braiding of hair and the putting on of gold jewelry, or the clothing you wear— but let your adorning be the hidden person of the heart with the imperishable beauty of a gentle and quiet spirit, which in God’s sight is very precious.” 1 Peter 3:3-4
Why is this important? Because the outer beauty does fade or change. The inner beauty can become more beautiful over time. The same is true in the world of investing.
This leads me to a quote I read from Barron’s. The title of the article was Stocks Just Can’t Compete With Bonds Right Now: “No matter how you slice it, stocks just aren’t that attractive relative to bonds these days.”
Stocks Cannot Compete and Bonds are Beautiful
“With stocks more expensive, they are compensating investors less for their level of risk than they have in the past. That is seen in the equity risk premium, or ERP—another measure of stock valuations that looks at stocks and bonds comparatively.” Barron’s
On the surface, this makes a lot of sense. According to this same article, “The S&P 500 is up 20% from a year ago, including a 16% year-to-date gain. That rise has come as consensus earnings estimates have been flat to down, making the index more expensive. The S&P 500’s forward price-to-earnings multiple stands at more than 19 times, up from 16 times a year ago and 17 times at the start of 2023.”
What is Wrong with This Perspective?
How long will bonds be beautiful? If you decide to marry a bond (not a blonde!), will it still make you smile with delight ten, twenty, or thirty years from now? I suspect not, if you take into consideration the long-term returns of stocks versus bonds. Furthermore, you must always remember the “I” word when buying an investment. The “I-word” is inflation. Notice two words in the Barron’s article: “Right Now.” Yes bonds are beautiful today, perhaps, but tomorrow or ten years from now?
The Truth in the Article
There is a nugget of truth in the Barron’s article. The truth is that stocks may be fairly expensive today compared to a reasonable price for that asset class. That is why it is best to buy slowly and cautiously in this inflationary, war-torn, political storm environment. What I prefer to do is gradually add more shares to our VYM, DGRO, and SCHD holdings over time. I won’t be buying bonds because the beauty of bonds is only skin deep. That beauty won’t last.
If You Buy Bonds
If you feel you must own bonds, then understand the bond fund you are buying. There are many flavors of bonds, and some of them are very dangerous, just like there are dangerous high-risk stock investments as well.
Full Disclosure
Cindie and I own very little short-term investments. Only one municipal bond remains in our portfolio. It is worth five thousand dollars, which is just a drop in the big investment bucket. I would be willing to sell it, but no one will pay me five thousand dollars to take it off of my hands.
In addition, the current dividend yield on our stocks and stock ETFs is five percent. Why would I sell my stocks, with dividend growth, to buy bonds that pay 5%. That is senseless.
All scripture passages are from the English Standard Version except as otherwise noted.
LINK: Barron’s Article
Know Your Flocks & Herds 