A.I.M. Users Bulletin Board

[ls7550]

'Cash' 1972 to 2020 inclusive, 1% annualised MORE than all-stock!!!

7.5% annualised real (after inflation) compared to 6.5% for all-stock.

Surely not?

Well a thought for the weekend and here are several links that were used as the basis for the observation.

=_1_=

=_2_=

=_3_=

Dow/Gold

The first two are for continuity, show the gains over 1972 to 1980 being rolled into the second period of 1981 to 2020. The third is the full 1972 to 2020 all-stock comparison.

Concept :

I am being pretty loose here as to what-is/definition-of 'cash'. Pre 1971 and money and gold were the same, exchangeable at a fixed rate, so it made more sense to hold money, deposited perhaps into Treasury Bills to earn interest, so that was like the state paying you for it to securely store your gold. Come 1972 however that coupling was broken, primarily as a means to help pay down the cost of the Vietnam war (ability to print/spend money that otherwise when backed by something tangible and finite i.e. gold could not be performed).

Place your mind into a end of 1971 cash investor where that breaking away from gold had occurred. What to do? Continue just holding cash/treasury bills? Or swap fully into gold? Or perhaps opt for 50/50 of both being unsure of what it all meant. For 1. above I assumed 50/50.

Roll on to 1980 and gold has done well, interest rates and inflation have soared, the Dow/Gold ratio has dropped to near 1.0 levels. What to do? Well perhaps lock into such high interest rates for the long term, swap out the cash/gold for long dated treasury bonds (LTT). 2 above assumes that, and where held ever since (to the end of 2020), i.e. rotated the 1. portfolio end of 1980 value into LTT's.

Compare that to 3. where all stock with the same start date amount was used, and at the end of 2020 the 'cash' investor had seen their portfolio value having risen from $100 in 1972 to $22,892, whilst the all stock investor had seen their $100 1972 start date value rise to $14,219, Which over those 49 years amounts to just shy of 1% annualised less than the 'cash' investor (0.977%). All stock real (after inflation) gains from 3. indicate 6.55% annualised, so 'cash' gains were around 1% higher, more like 7.5% annualised.

As my 20's sons would say, "WTF! How did that happen?". Well the answer is that gold had a good up run in the 1970's and then those good gains were locked into 1980's high yields (long dated treasury bonds) that subsequently saw yields decline that pushed prices for those bonds upward. From present day valuations, very low yields/inflation, long dated bonds are relatively expensive. After two trades, one in 1972 and another in 1980 its time to rotate out of long dated treasury, perhaps back into 50/50 cash/gold; And perhaps in less than a decade that might have seen interest rates/inflation spike to levels where we might ponder whether we should once again lock into longer term bonds again when yields/inflation seem relatively high and/or the Dow/Gold ratio had dropped to relatively low levels. And perhaps in another 20, 30, 40 ... whatever years time, 'cash' might have continued to out-run stocks.

Clive.

PS

In a 1950's tour of the New York Stock Exchange Groucho Marx said

Gentlemen, in 1929 I lost eight hundred thousand dollars on this floor, and I intend to get my money's worth!

(note that since then inflation has seen prices rise 15.6 times, so his suggested loss was around $12.5 million in present day inflation adjusted terms)

As he was walking around the floor, one of the traders asked him, "Groucho, how do you invest your money?" He answered, "I keep my money in Treasury bonds," to which the trader replied, "But Groucho, they don't make you much money." And Groucho responded, "They do, if you have enough of them!".