Why bonds aren’t good investments

By Felix Salmon
November 30, 2009
a home is not an investment, what about a Treasury bond? In my comments, Dan responds forcefully to Urban Legend, who was trying to make the case that low interest rates do a lot of harm to those poor millionaires looking to live on their risk-free interest payments alone:

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If a home is not an investment, what about a Treasury bond? In my comments, Dan responds forcefully to Urban Legend, who was trying to make the case that low interest rates do a lot of harm to those poor millionaires looking to live on their risk-free interest payments alone:

If you think it is reasonable to get a 5% return on top of inflation without taking risk, I have some oceanfront property in Nevada to sell you. That may have been possible in the past, but we are in a new world now.

Investing is not about loaning your funds out to a government, completely abdicating responsibility for finding meaningful uses for the capital and then expecting a substantial return above inflation. Our governments are nearly bankrupt.

If you lend to a nearly bankrupt and profligate entity, you deserve to lose a lot of money. You are like a bartender serving a drunk who is drinking himself to death. You are not innocent. You are part of the problem, and your investments are making the world worse. You don’t deserve a good return for that.

How to invest? If you really want risk fee, go for TIPs, but don’t expect much beyond inflation. Better yet, learn basics of business and investing and carefully loan out to local small businesses. Or be a landlord, watching your profit and dividends every month. Or invest in important and useful companies via the stockmarket. Or invest in making your house energy efficient. Or invest in your childrens’ and grandchildrens’ educations. Or donate it for research to invest in everyone’s future.

Whine about the Fed if you want. Your treasury buys make all these games possible.

I just made a significant investment in Apple, but I didn’t touch the stock: instead, my house now sports two brand-new computers, and already the returns on those computers are proving higher than I’d anticipated. (Although if you’re in NYC and are willing to trade knowledge of Mac OS X Server for good food and wine, I think I have a deal for you.)

There are lots of ways to invest well, and most of them don’t involve buying securities which rise in value. I often feel that stock-picker types are missing the point, rather — especially nowadays, when the future of the capital markets has never been cloudier.

If you really want to play a game where the person with the best-performing stock portfolio wins, then fine. But other kinds of investing, like for instance Dan’s idea of providing much-needed funds for a small local business, can be more rewarding in other ways. The world of securitization and capital markets turns out not to have been nearly as good at capital allocation as most of us thought it was. So maybe we should go back to making our own real-world investment decisions, rather than trusting in the markets to get it right.

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