04-28-2009, 11:31 AM
Quote:Our all-time favorite graph shows the results from investing $100 in a 25-year zero-coupon Treasury bond at its yield high (and price low) in October 1981, and rolling it into another 25-year Treasury annually to maintain that 25-year maturity. On March 31, 2009, that $100 was worth $16,656 with a compound annual return of 20.4%. In contrast, $100 invested in the S&P 500 at its low in July 1982 was worth $1,502 last month for a 10.7% annual return including dividend reinvestment. So Treasuries outperformed stocks by 11.1 times!
yes, they sell the bond every year to realize the capital gains and then reinvest into another 25yr maturity.
there are some unique elements to treasury bonds that make this strategy possible, but also highly unlikely. T-Bonds are not callable, they cannot be paid off early. If you take the example there is the practical possibility that those gains were taxed at the regular income rate, as opposed to the lower capital gains rate, if they were done exactly on the year schedule.
but the biggest problem i have with this is that in most of the years as interest rates were declining, you would have had to sold a 25yr treasury strip (that now had 24 years to maturity, because it was a year old) and buy a new 25 strip that had a lower coupon yield because the current interest rates are now lower than where they had been a year ago.
More over, because T-bonds have the full faith and guarrantee of the US government they are considered safer and therefore pay less interest than corporate bonds. so your average person living off of interest never buys T-bonds because the cash flow is higher on corp bonds (and higher on municipal bonds depending on tax bracket).
imho, what the writer did was find a period of time where a strategy performed considerably better than the stock market but it was a strat no one would implement for personal use and then draws eroneous conclusions about the stock market. even if they did employ this strategy successfully, now they acknowledge it is over
Quote:Unfortunately, that rally is over. Our target of 3% yield on 30-year Treasuries, down from 14.7% in 1981, was exceeded at the end of 2008 when the yield fell to 2.6%.
so now what are they going to recommend that is going to beat the 10% buy and hold strategy.