The Long Suffering

Investors are guaranteed to suffer from long periods with negative real returns.

The other day Ben and I were discussing this topic, which was inspired from the tweet below.

A few things about this didn’t look right to me and what jumped right off the chart was US Treasuries. I’ve looked at this before and remember there being more than 50 years of negative real returns. So I clicked on the link and turns out there wasn’t anything wrong with the chart, only that it started in 1970. So with this in mind, we recreated it going back to 1926.

We know that stocks are risk assets, and that U.S. government bonds, specifically one-month T-Bills, are often referred to as risk-free assets. But the absence of risk can be very costly if your goal is to outpace inflation, which is why we take risk in the first place. Looking at this chart, one should conclude that risk-free is not only reward-free, but its the epitome of risk.

An investors job is to balance the different risk and reward profiles of various asset classes and strategies and find something that approximates their tolerance for discomfort. All the rest is academic.