1) In yesterday's e-mail, I shared my latest thoughts on stocks, concluding that "I remain constructive."
Today, I'd like to share my thoughts on bonds and cash...
Bonds have been a terrible investment since the depths of the COVID-19 crisis in early 2020, when interest rates hit a generational low.
They've rallied strongly since then, which has crushed their value – especially long-term bonds.
In fact, U.S. bonds have given negative returns over the past 10 years – even before factoring in inflation. It's only the second time this has happened in the past 233 years, as this chart from Bianco Research shows:
I'm not an interest-rate prognosticator, but I can still identify stupidly, unsustainably low interest rates... So I've warned my readers to stay away from bonds many times.
Most notably, in my October 12, 2021 e-mail entitled "Financial advice to retired readers," I suggested that a hypothetical couple should put 60% of their long-term nest egg in stocks and keep the rest in cash:
As for the remainder, I'd leave it in cash or cash equivalents – perhaps [one-fourth of the remainder] in a checking account (even though it earns almost no interest these days) and the balance in a super-safe short-term bond fund with a one- or two-year duration that might earn a little interest. That's what I did with some of my excess cash at Citibank – most banks and mutual fund companies will have offerings.
And as for bonds, I wrote:
I suspect many financial advisors would advise this couple to put a significant amount of their savings in higher-yielding bonds – either longer-dated and/or riskier ones – but I'm worried about rising interest rates (which would crush long-term bonds) and the paltry yields relative to risk with corporate and municipal bonds. To use a phrase coined long ago by Jim Grant, bonds in general these days in my opinion offer "return-free risk" (as opposed to what they're supposed to offer: risk-free return).
Sure enough, interest rates have risen substantially since then...
Here's a five-year chart of the yield on 10-year Treasurys, which has risen from 1.4% to nearly 5% today:
And here's a five-year chart for the 30-year Treasury yield, which has gone from 1.9% to 5.3% today:
In light of these big shifts, I've moved from bearish to neutral on bonds.
They're now paying a respectable interest rate – but still far below levels reached during the inflationary 1980s, as you can see in these long-term charts:
2) What about cash and cash equivalents like short-term Treasurys?
In general, I've long agreed with what Warren Buffett wrote in his seminal New York Times op-ed: Buy American. I Am. He published it on October 16, 2008, during the depths of the global financial crisis, writing:
Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.
That said, there are two good reasons to hold cash today...
First, retirees who are financially secure (such as my parents and the hypothetical couple in my 2021 e-mail) can dial back the risk in their portfolio by holding some cash, so they have a failsafe no matter what the stock market does.
Second, if you're a stock picker, you always want to keep some "dry powder" to take advantage of great opportunities when they present themselves.
And one such opportunity is about to reopen...
It's the same trade I made in 1999, at the peak of the dot-com bubble. It helped me build my $200 million hedge fund, which went on to crush the market.
As I've said many times, today looks similar to back then... Big tech stocks have been driving the market. But it's time to prepare for a new group of unknown names to take the lead. And it could hand investors 1,000% returns.
I just went on camera to reveal all the details of this huge opportunity. I also shared the name and ticker symbol of my favorite stock to buy... and one to dump immediately.
If you missed my special presentation, don't worry. You can watch a replay right here.
3) To repeat what I've said many times before, it's critical that you earn a market interest rate on the vast majority of your cash.
Don't let cash pile up in your bank account, which pays zero (in checking accounts) or close to zero (in bank savings accounts). And make sure your brokerage is paying you fairly.
Right now, for example, Fidelity is paying 3.34% on the cash in my dad's account – I know because I helped him move some money from there to his checking account to pay bills.
When we logged into his account, we saw two cash accounts and couldn't tell what interest he was earning for each one. So we called Fidelity and learned that a substantial amount of cash was only earning 1.8% annually.
Once we discovered this, it took only a few clicks to move the cash into the other account – and he'll make thousands of dollars more in interest every year.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.