Should Anyone Be Surprised that Government Bonds Might Not Be a Good Investment for the Next Few Years

Burton Malkiel, famous for having written a book titled A Random Walk Down Wall Street where he argues there’s no systematic way to beat the market, offered this big-picture advice for balancing an investment portfolio in yesterday’s Wall Street Journal

Are we in an era now when many bondholders are likely to experience very unsatisfactory investment results? I think the answer is “yes” for many types of bonds—and that this will remain true for some time to come….So what are investors—especially retirees who seek steady income—to do? I think there are two reasonable strategies that investors should consider. The first is to look for bonds with moderate credit risk where the spreads over U.S. Treasury yields are generous. The second is to consider substituting a portfolio of dividend-paying blue chip stocks for a high-quality bond portfolio.
Malkiel explains his point with some interesting back-of-the-envelope macroeconomics.
But at least with regard to his second option, the blue-chip stocks, isn’t he explaining something that’s readily obvious from the state of our political system, i.e. right now, so many units of government have been run so badly, it is going to be a while before they can raise the money to take care of their governing obligations and pay high-interest bond yields, meaning that (to borrow a juxtaposition from Justin) investing money in actual productive activities right now is a much better option than investing in the government’s ability to tax?

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11 years ago

“Should Anyone Be Surprised that Government Bonds Might Not Be a Good Investment for the Next Few Years”
No, because we are reaching the limit on how much can be extracted by taxation yet the spending by our elected officials has not conformed to that limitation, especially on the federal level.
It’s interesting that the group which is realizing this (private investment) and acting accordingly has its own, real money at stake.
Conversely, those who urge ever more government spending – certain of our elected officials as well as certain union leaders (and here I am specifically referencing Rhode Island) – do not have their own money at stake. Therefore, they don’t perceive it as having limitations as to quantity nor do they value it as they would their own.
Great example of that last point: Senator Sheldon Whitehouse was oh so careful to use insider knowledge that he obtained from his official position to avert losses in his own portfolio – losses which many of his constituents experienced because they lacked both the knowledge and questionable ethics which the Senator possesses. Yet Senator Whitehouse blithely voted to spend several trillion tax dollars – dollars that were not, of course, his own.
“I’ll conscientiously protect my own dollars while cavalierly spending yours”: that is the motto of the junior senator from Rhode Island.

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