As the world swirls in chaos—with hurricanes, wars, and elections of unprecedented consequence—it’s easy to lose sight of one fundamental investing fact: rates of return, over hours and days, are affected by nearly everything. But over quarters and years, they’re only affected by earnings, interest rates, and inflation. It’s understandable to get distracted by the daily news cycle. In the myopia that results, especially in the face of an uncertain world—where crisis after crisis pops up like the old arcade game of Whack-a-Mole—the temptation is to make changes based on flitting and unknowable assumptions that do absolutely nothing to determine success over the long term.
While everyone focuses on oil prices and the Middle East, neither of these (despite how consequential they are for human beings) is likely to affect long-term returns on stocks and bonds. That’s just a simple fact, borne out by all history and ignored at any investor’s peril. If it proves to be true, as it always has, then eyes should be focused on things like bond rates of return, duration, and maturity, and earnings yields on stocks—nothing more, nothing less. Especially at times of great worldwide macro-noise, a laser focus on the fundamentals is essential.
As an example, investment-grade corporate bonds are by far the best deal in the fixed-income universe. They yield close to 5%, double the recent reduced inflation rate. They can accomplish this with a limited duration: two to seven years, a reasonable timeframe that reduces interest-rate risk. The yield on corporates is substantially higher than the equivalent yield on Treasury bonds. Even municipal bonds, with their tax advantages, do not quite reach the same tax-equivalent yield for most investors. Arguably, corporates have more credit risk than government bonds, but I would say that long-standing assumption has shifted over the past decade, where risk has been transferred from company balance sheets to government ones due to Covid, business tax-breaks, and fiscal mismanagement. Treasury bonds, for instance, require Congressional approval to be funded—a hurdle that used to be routine but is now significant.
The bottom line is that your retirement is more likely to be influenced by the choice of bonds in your portfolio than by the many moles that pop up and demand your attention on an unrelenting, daily basis. As Warren Buffett often explains, if you stay focused on what matters, investing becomes remarkably simple.