What happened to Tina, aka “there’s no alternative”
She has been defending stock market investing for years. Her pitch was straightforward. With interest rates close to zero and shares still out of favour in a sluggish post-financial-crisis world, the case for buying stocks was irrefutable.
There was no competition on valuation grounds, especially between bonds and equities.
In the past, when shares traded on multiples of earnings that were in the teens, the yield of shares was at least 7pc (the upside down view of this ratio).
This is what the average business generated on your money. Some of it was paid as a dividend, and the remainder was reinvested in the company. You benefited in either case.
By contrast, the yield on Treasuries and Gilts was almost nothing. Even if you were to take the risk and lend to a business, accepting the fact that they are more likely to break their promises than a government in a developed country, the returns would still be unappealing.
The return you received from the shares of the same company was probably half that offered by bonds. This comparison is called “a no-brainer”, because there’s no reason to not prefer bonds over shares.
Cash is no different. Cash was held in portfolios for a variety of reasons, none of which were related to its return.
Cash was a dry powder to be used when the market went through one of its periodic slumps. The cash value could not fall in nominal terms either, which made it attractive after the bear market of 2007-09. Its yield was essentially zero.
Even when inflation was lower than today, the real value of inflation was negative.
Investors chased higher returns, and even traditionally high-yielding assets like real estate fell off investors’ radar. Commercial real estate yields were pushed up to levels that ignored the reality of sometimes empty offices and shops as well as ongoing maintenance costs, illiquidity, and obsolescence.
Tina is no longer visible. In the short term, all investment options look very similar for the first time since years. Cash, bonds, properties and shares all have earnings yields of around 5pc.
It will take approximately 20 years for you to recoup your investment, regardless of the asset class that you invest in. There are suddenly no “no brainers”. You can make a case for anything or nothing. Many of these options involve moving money out of the stock exchange.
Bonds, for instance, are a compelling investment right now. This is especially true as interest rates continue to rise and peak later than expected.
It’s hard to imagine that the central banks will not overdo this year, in order to prevent inflation from escalating under their watch.
Investors are more likely to lock in high yields and then benefit from a capital gain when rates fall.
Money market funds are also attractive to risk-averse investors. Money market funds are a portfolio of short-term bills and bonds, which is essentially higher-yielding money. They have been used as a temporary home for investors looking to find a better investment. They now appear to be a good long-term investment.
Mortgages are spiraling out of control. The 2-year fix in the UK surpassed the 6pc hurdle this week.
You have to have confidence in your ability to invest to believe that you can use your spare money to pay off your outstanding loan.
Investors have been forced to consider the risks and goals of their investments as the short-term returns on a wide range of assets are balancing.
Take risks. Today, investing in the stock markets requires a positive outlook on earnings.
It is based on heroic assumptions that we will be able to achieve a soft land.
Odds on a recession are now significantly higher. The uncertainty has not been fully priced.
In real estate there are a growing number of reasons why government bonds offer similar returns but with lower risks. No tenant default, no onerous environmental regulation.
A nice insurance policy is a better alternative to a bad outcome. All in one easy-to-trade package, with Uncle Sam’s or the UK Treasury’s explicit support.
Finally, there’s an alternative to risky investments. Tina’s not the only date available.
She can make a good case, but it depends on your situation. Even though shares may offer a similar return in the short-term, they will continue to provide superior returns over time for those with a long-term investment horizon. A diversified portfolio can still include the right type of property.
It’s also not just about performance. Over time, a balance between equity and fixed income will still deliver smoother returns.
Vanguard research dating back to 1977 shows that last year was the only time in history when both bonds and shares fell in one calendar year. Every other year either one or both had risen, or a gain in one offset a loss in the other.
Investors may find it difficult to manage their finances when new options appear. It is better to be stuck with this problem than having to invest in shares.