The 168 Letter

The Habits of Great Investors

The Madness of Bonds

If you’ve glanced at the financial news lately, you’ve seen the headlines. Interest rates are climbing at a record-setting pace, and 30-year Treasury bonds now yield 5.67%, the highest level in more than two decades.

That has a lot of investors nervous, and it has revived an old idea. Whenever long-term rates jump, someone suggests that bonds might not be such a bad place to invest, especially for retirees who live on their income. Nearly 6%, guaranteed by Uncle Sam? That sounds like it could compete with a risky stock market.

I want to make the case that it’s a kind of madness.

Thirty years is a useful yardstick. The 30-year Treasury is a benchmark for long-term interest rates, and for a married couple retiring in their mid-60s today, there is a very real chance that at least one of them will need income for 30 years or more. So let’s look back exactly 30 years, and see what we can learn.

Despite all the hand-wringing about today’s yields, in October 1996 the 30-year Treasury yielded 6.81%, more than it does now. Not a bad deal for a retired income investor. Let’s follow one who put $1,000 into that bond back then.

The good news. She has collected $68.10 in interest every year for 30 years, like clockwork. Uncle Sam never missed a payment. Within the next few weeks her bond matures, and she gets back every dime of her principal. Apart from a couple of credit-downgrade scares over the last 3 decades, she never had to worry about it.

The bad news. Her cost of living more than doubled along the way. Consumer prices are up about 110% since October 1996, so the $68.10 that arrives this year buys what about $32 bought when she started. Her income was cut by more than half, not by any default, but by inflation. And her returned $1,000 buys less than half of what it did when she invested it.

Just for kicks, compare her with a neighbor who put $1,000 into the S&P 500 that same month. In the first year his dividends came to about $21, less than a third of the bond’s income. That’s exactly why income investors pass on stocks. But his dividends grew. Today that same $1,000 investment pays about $112 a year, more than five times what it paid in 1996, and far more than the bond’s $68.10.

S&P 500 trailing 12-month dividends of $14.90 (Oct. 1996) and $78.92 (2026) per index share; index level of about 705 in Oct. 1996; CPI-U up about 110% (158.3 to roughly 333). Figures are rounded, exclude taxes and fees, and assume dividends and coupons were spent, not reinvested.

That is the whole point. Over 30 years, the equity investor’s income gained purchasing power while the bond investor’s eroded. It might seem like piling on to mention that the stock investor’s original $1,000 is now worth nearly $11,000, before counting a single dividend. The bond investor still has $1,000.

As I’ve written before, heading into a 30-year period of relentlessly rising living costs funded by a fixed rate of interest just makes no sense.

It’s also worth remembering what happened during those 30 years:

• The Asian financial crisis, the Russian default and the collapse of Long-Term Capital Management
• The tech bubble bursting, with stocks down nearly 50%
• The Enron, Tyco and WorldCom accounting scandals and bankruptcies
• September 11th and two decades of war in the Middle East
• The Global Financial Crisis, with stocks down more than 50% again
• The European debt crisis and the first-ever downgrade of U.S. credit
• A global pandemic and the fastest bear market in history
• The worst inflation in 40 years and the sharpest rate hikes in a generation
• Regional bank failures, government shutdowns, trade wars, a disputed presidential election, and today’s conflict in the Persian Gulf

Which raises the question: how? How could stock prices rise roughly tenfold, and dividends more than fivefold, through so much geopolitical and economic strife?

The answer may be the greatest investing epiphany a person can have, and one of the hardest to grasp. The media and our culture constantly tell us that stock prices are driven by the economy, financial conditions, politics and geopolitics. They are not.

Stocks are fractional ownership of businesses. Over the long run, their prices are determined by one thing: how much money those businesses earn. Over these same 30 years, S&P 500 earnings grew more than sevenfold. Prices followed the earnings. Dividends followed the earnings. The headlines, it turns out, did not matter very much at all.

Today’s 5.67% bond market looks tempting. So did 6.81%. The bond guarantees the payment. Nobody guarantees what the payment will buy.

The 168 Insight

The One-Page Test

Today, October 15th, is the extended deadline for filing last year’s tax returns. If you’re signing yours this afternoon, you have plenty of company. It’s also a good moment to ask why something you do every year still runs to the last possible day.

For most successful families the answer is complexity. It builds quietly. A new account here, a trust there, a business interest, a rental property, an inherited IRA, a 529 for each grandchild. Each piece gets handled by someone competent: the CPA, the estate attorney, the insurance agent, the 401(k) provider. But often nobody is responsible for how the pieces fit together, so you end up carrying that job yourself, usually in your head and usually at night.

Here is a simple test. Could you fit your financial life on one page? What you own and where it is, what each piece is for, who is responsible for it, and what happens to it if you aren’t here tomorrow. Most people with real wealth can’t, and that gap is where money and hours leak out.

Three places complexity is hiding this fall:

1. Estate documents written for the old law. The federal estate tax exemption is now $15 million per person and is no longer scheduled to drop. Wills and trusts drafted around the old “sunset” often use formula clauses that may now send assets somewhere you never intended. They are worth a fresh read.
2. Charitable giving under new rules. Starting this year, itemizers can deduct only the portion of their charitable gifts above 0.5% of adjusted gross income, and the value of the deduction is capped for top-bracket taxpayers. If you’re 70½ or older, giving directly from your IRA through a qualified charitable distribution may now be the most efficient way to give.
3. Cash that nobody is watching. With rates at multi-decade highs, money parked in a checking account, or sitting idle after a sale, has a real cost. Getting it to work should be part of the plan, coordinated with your tax picture and your long-term investments, not a separate decision.

The goal isn’t to make your financial life simple. A full life is a complicated one. The goal is to make sure someone is holding the whole picture, so you don’t have to. That is the kind of delegation that gives you your hours back.

Valuables

Count the Visits

Here is an exercise that takes about 30 seconds and may stay with you for years.

Think of someone you love who doesn’t live under your roof. A parent, a grown child, a sibling, your oldest friend. Estimate how many times a year you actually see them in person. Now multiply that by the number of years you can reasonably expect to have together.

For most of us, the answer is startlingly small. If your parents are in their late seventies and you see them twice a year, you may have fewer than 25 visits left. The writer Tim Urban ran this math on his own life and found that by the time he finished high school, he had already used up about 93% of all the in-person time he would ever spend with his parents. Standing on the steps at SMU during my daughter’s parents’ weekend last month, I found that number hard to shake.

Science has a lot to say about what to do with that number. The Harvard Study of Adult Development has followed the same families for more than 85 years. Its director, Robert Waldinger, puts its central finding plainly: the best predictor of who would be healthy and happy at 80 was not cholesterol, fame or wealth. It was the quality of their relationships at 50.

Money does matter, though, in how you spend it. Research led by Ashley Whillans at Harvard Business School found that people who spend money to buy back time, by paying someone to handle chores they dislike, report greater life satisfaction at every income level. Other studies find that spending on shared experiences and on other people does more for happiness than spending on things for ourselves.

Put those findings together and you get a practical way to think about wealth. It is a tool for buying visits.

Book the flight before you feel like you “have the time.” Rent the bigger house so the whole family fits under one roof for a week. Pay for the grandkids’ plane tickets. Hire out the chore that eats your Saturday, and spend the Saturday with someone. Put the family trip in the financial plan as a line item instead of something funded from whatever is left over.

You can’t make more hours, and you can’t buy more years with the people you love. But you can make sure more of the hours you have are spent with them.

Count the visits. Then go add one.