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REAL Long-Term Investing: 7% Annually for 135 Years Print
Thursday, 12th February 2009 (by J.D.)This article is about Funny Money, Investing, News
Now that I’ve finally finished the busiest month of my life, I can begin reading the stories submitted by GRS readers again. I find plenty of neat stuff while surfing the web, but there’s no question that you folks submit the best articles!
For example, Jeff V. pointed me to a piece in today’s New York Times that demonstrates some real long-term investing. Thirty-nine bondholders still own securities issued by New York City shortly after the Civil War! From the story:
Next month, one of the bonds, issued in 1868 and thought to be one of the oldest active municipal bonds in the country, will come due. And the city stands ready to retire the debt incurred when Winston Churchill’s grandfather came up with the idea of building a road to one of the nation’s first racetracks, which he had opened in what is now the Bronx.
For 135 years, New York City has been dutifully paying 7 percent annual interest on the bonds, which financed construction of the road. On March 1, the owner of one of them is entitled to come forward and collect its face value: $1,000.
The other 38 bondholders have notes that will mature sometime between now and 2147, a mere 138 years away.
This isn’t just a fascinating glimpse at history, but also at the power of inflation. When these bonds were issued, the interest on them ($70/year for a $1,000 bond) was a lot of money. At that time, the article says, it was “enough for a down payment on a middle-class house of good construction, which cost about $300.”
As the stock market continues to stagnate, the average investor is likely to become more interested in bonds. If you’re unfamiliar with them, take a moment to check out “What is a bond?” from the GRS archives. You may also be interested in Fidelity’s primer on how bonds work.
February 12th, 2009 at 12:55 pm
I think anyone that has been considering moving a big portion of their investment portfolios to bonds already has. I believe those who are just now seeking safety in bonds, specifically government bonds, will lose a relatively large amount of money when interest rates rise and that bubble pops. Stay away unless you know what you’re doing. Just my 2 cents…
Edit: Of course diversification is what I was getting at. You should never put all your eggs in one basket. Bonds still belong in a balanced portfolio.
February 12th, 2009 at 1:01 pm
Has the golden financial rule of “diversification” changed much? If not, then bonds still seem like a good investment tool (albeit if you’re not heavily invested in them in relation to the rest of your portfolio).
Best,
Scordo.com
February 12th, 2009 at 1:03 pm
Unfortunately, in the long-term, we’re all dead. I don’t think I know anyone who’s lived to 135. Great for your grandkids, though!
February 12th, 2009 at 1:07 pm
Think of the compounding on 7% over 135 years. Even when you take into account inflation, it’s got to be a good deal.
As an aside, for some reason I feel that prior to the 20th century, inflation was significantly lower than it currently is - income was more important than capital growth. Anyone know if that’s true?
February 12th, 2009 at 1:25 pm
@Plonkee
Awesome question, as always. I dug up a few links with data to explore your question:
http://www.gocurrency.com/articles/stories-inflation.htm
http://en.wikipedia.org/wiki/File:US_Historical_Inflation.svg
http://oregonstate.edu/cla/polisci/faculty-research/sahr/sumprice.pdf
http://www.measuringworth.com/uscompare/
The PDF from Oregon State contains a number of chart that go back a long way. In the middle of the document is a chart that shows the annual inflation rate. It looks as if until just after World War Two, U.S. inflation fluctuated wildly, with periods of severe deflation mixed with periods of severe inflation. Interesting. Since 1950 or so, things have been relatively smooth, with the exception of the 1970s. And, possibly, the 2010s!
By the way, the Measuring Worth site indicates that $1000 in 1868 would be worth $15,000 today. That inflation doesn’t seem so bad, does it?
February 12th, 2009 at 1:33 pm
“By the way, the Measuring Worth site indicates that $1000 in 1868 would be worth $15,000 today. That inflation doesn’t seem so bad, does it?”
I wonder what the Measuring Worth site is basing that calculation on. The BLS inflation calculator (http://www.bls.gov/data/inflation_calculator.htm) only goes back to 1913, but it says that $1,000 in 1913 had the buying power of $21,457.07 today. Add on another 45 years of inflation to $21k and it sounds a whole lot worse to me…
February 12th, 2009 at 1:41 pm
I took a quick look at the Measuring Worth site. I think you start getting inaccurate data when you try to calculate for dates that occurred before those records existed. If you put the numbers in for 1868 and calculate it against the CPI, it gives you a smaller number than if you calculated it for 1913 (presumably because the CPI data doesn’t go back nearly far enough).
February 12th, 2009 at 1:57 pm
Are you kidding me? Why are people investing in bonds?
Do we go to the supermarket and purposely not buy everything in the sale flyer because it is on sale?
Why would we avoid all the stocks on sale? It seems ridiculous to me. In 2009 or 2010 there is a strong likelihood of a 30-40% increase in the stock market based on previous recessions. And while that’s happening people are going to be in bonds???? WHAT! Ridiculous.
RID-IC-U-LOUS.
-Nate
February 12th, 2009 at 1:58 pm
Inflation is held more or less steady in this country because that is the primary goal of the government and/or quasi-governmental entities that control our money supply. They want a small, but positive inflation number to avoid the damaging effects of high inflation while still forcing (encouraging) people to invest or spend their money rather than just save it. On the other hand some believe that the way the government tweaks the way inflation is calculated, is pretty much messed up and sneaky.
February 12th, 2009 at 2:06 pm
In today’s economy with higher inflation on the horizon, how do we define long term financial safety: the preservation of principal or the preservation of purchasing power?
February 12th, 2009 at 3:24 pm
@J.D.
I did a little digging myself. In the UK, the value of the £ was fairly constant in the 19th century (after the end of end of the Napoleonic Wars). This is a research report from the House of Commons
Inflation: the Value of the Pound 1750-1998
February 12th, 2009 at 4:54 pm
Wow, a steady 7% return in 135 years. That is not a Ponzi scheme. I wish my grandfather had bought something like that for me.
I don’t think I can achieve such returns for my grandkid.
February 12th, 2009 at 5:41 pm
According to Four Pillars, before the abandonment of the Gold Standard, inflation was pretty much non existent.
February 12th, 2009 at 7:10 pm
I am getting really tired of hearing about the benefits of buy and hold investing. At the very least it has been proven that re-balancing (which is really a form of market timing) always improves portfolio performance. Buy and hold is better than chaos, fear and loathing, but it isn’t better than a well executed mkt timing approach.
February 13th, 2009 at 1:01 am
Great find JD’s anonymous reader. Buy and hold does work, but only when coupled with smart diversification. If you want proof check out the richest families in US which pass the wealth from generation to generation such as the Rockfellers.
As for these muni bonds, the main problem is that they didn’t compound at 7% for 135 years. Had someone compounded a $1000 investment for 135 years at 7%, this investment would be worth about $9.264 million.
Of course an investment in long-term bonds in Russia, China, France, Germany at that time would have resulted in total loss of principle. If you bought stocks, your results would have been stratospheric.. If you bought gold $1000 would have been enough for 50 troy ounces of the yellow metal.. worth $45K today..
February 13th, 2009 at 4:35 am
Interesting post from a historical perspective . . .
February 13th, 2009 at 11:24 am
Glad to see other intelligent people here. Bonds are NOT the place to be right now. They look safe, because in the last 25 years they have been amazingly safe. But they are really in a bubble. The real estate bubble just transfered over to the bond bubble. Its going to burst, and soon, judging from how quickly the govt is spending money.
Short term bonds if any at all. Please don’t invest in anything because someone tells you it looks good. Do research yourself. Understand the market. If you don’t have time, you are better off investing in something you DO understand, or just getting an index fund (instant diversification).
February 13th, 2009 at 11:34 am
As far as I’m concerned, the best thing you can do for your grandchildren is buy dividend-bearing stocks, and hold them forever. A few splits later, and you have a decent flow of money.
February 13th, 2009 at 12:50 pm
That is an awesome story.
February 13th, 2009 at 7:48 pm
One thing left out of here AND ‘What is a Bond’ is the after-issue aspects of a bond. Let’s say you get a 6% bond, face value of $1,000, and interest rates go to 4%. If you are a new investor, would you rather have a bond paying 4% or 6%? Of course 6%, so second-market (buying already issued bonds, like the stock markets) would charge more for the 6% bond, to pull the yield in line with the current 4%. Therefore people would pay extra for your bond.
Likewise, the 4% bond would drop in value if interest rates went up. So your 4% bond in a world of 12% rates would look pretty bad… And probably only be worth $700 or less if you went to trade it in.
Currently, the FED is near 0%, and a 30-year bond has a yield of 3.68%, according to Yahoo! Finance. As soon as the credit markets settle, do you think they’ll be raising rates? That will make the yields look pretty small, and push down the prices if you think about selling them.
Bond funds have done pretty well while they were still dropping rates, but now that they can’t, I wouldn’t touch bonds except to short them. My suggestion with the bond allocation of a portfolio? Money market until rates go up a bit, then buy bonds.
30-year bonds were around 12% in 1985, so anyone who bought them are STILL making 12% on their money NOW. Let’s not get stuck with 3.7% through the next 30 years!
Look at the world situation around before choosing any investment. Personally right now, I like appreciating equities and solid companies whose stocks have been hammered in spite of the fact that the company is still doing well. Not low-paying debt investments.
February 13th, 2009 at 9:12 pm
For Justin:
The Dow Jones Industrial Average “was published on May 26, 1896, and represented the average of twelve stocks from important American industries. Of those original twelve, only General Electric is currently part of the index.” According to Wikipedia.
112 years later, 8.3% of the original list is still there. Some of the others are still around - bought out or on a smaller index - but still.
Do your research, invest in things you understand, and follow up regularly.
February 14th, 2009 at 2:12 am
@plonkee, @J.D. - It’d be interesting to plot inflation expectations against the popularity of bonds, cash and equities over the past couple of hundred years. Perhaps an investment bank has already done the heavy lifting? Will research!
February 14th, 2009 at 9:04 am
Bonds, especially Treasuries, will underperform the stock market in the upcoming years. The government is printing money which will lead to higher inflation. This will be horrible for bonds. Corporate junk and even munis are interesting at these levels as spreads versus treasuries have widened significantly.
Just my 2 cents