I’ve always been amazed at how quickly investors forget what it feels like to lose money.
One of my favorite economists, whom will remain unnamed, is a constant stock market cheerleader. He’s never met a market he hasn’t liked. I love his optimism and I too believe, like he does, that Trump’s tax cuts will keep us chugging along for some time.
But that doesn’t mean stocks will always rise like the sun.
Where I take issue with this perma-bull economist is his call that the bull market in bonds is over. He also says that bonds, more than stocks, are in bubble territory. He takes the inverse of the 10-year Treasury yield of 2.5% which is a price-earnings yield of 40, and then compares it to stocks.
But how much comfort do earnings yields offer when stocks crash? Playing that game, the S&P 500 P/E of 26 has an earnings yield of 3.8% or if we take Amazon with its P/E of 314, its earnings yield is 0.3%. Not exactly a bargain.
The key to your investment success, and survival, is to remember what it feels like to own bonds (like Vanguard GNMA) when stocks crash, and to never forget what it feels like to keep more of your money while others are losing it.