Buy This and You Will Lose 99.999% of Your Money

The sky is falling... the sky is falling!!!

Well, not exactly, but investors globally are certainly concerned about Spain's growing economic woes, Greece's inability to stand on its own two feet, China's growth slowdown, and the United States' sudden reversal of fortune as evidenced by May's jobs report.

Very simply put, fear begets risk-aversion for many investors, and flocking to the safest investments available is not always the best choice. In fact, sometimes it can be downright toxic for your portfolio.

Not as safe as you think
Take, for example, U.S. Treasury bonds, which have been in a 30-year bull market, give or take a few minor corrections. As the price of U.S. Treasury bonds rises, the underlying yield the owner of that bond would expect to receive falls. You may wonder what would cause a bond to rise in value. Pretty much the same concept that governs a stock: considerably more buying demand than selling demand. And, wow, have we been seeing buying demand.

The demand to buy Treasury bonds has been so strong over the past two-and-a-half months that the U.S. 10-year T-bond has lost roughly 90 basis points off its yield and is now sitting at about 1.5% -- a record low. To put it another way, buyers are lining up around the block to purchase extremely safe bonds issued by the U.S. government.

But is this a good move for investors? You might be thinking, "This is as guaranteed a return as I can get on my money. Plus, it's backed by the U.S. government, so I don't have to worry about the risk of default!"

True, the chance of default is very slim, and you will get a nominal "return." But in real dollars that investment in U.S. Treasuries could wind up costing you nearly your entire investment.

The reason is really simple: inflation!

Inflation, or the rising costs of goods sold, has historically risen at a faster rate than the current yield of every last T-bond you can currently purchase. That means investors who are running for the hills away from the stock market are trading in $1 for something much less down the road. Utilizing the average inflation rate of 3.61% since 1914, let's take a look at what an investment of $1,000 would look like in nominal dollars and real dollars if it were continuously rolled over until it doubled.

Treasury Bond

Nominal Value

Current Yield

Length of Time to Double

Real Dollar Value (inflation adjusted)

30-Year T-Bond $2,000 2.57% 28 years $2,699
10-Year T-Bond $2,000 1.53% 47 years $5,295
5-Year T-Bond $2,000 0.68% 106 years $42,912
2-Year T-Bond $2,000 0.25% 288 years $27,269,805
1-Year T-Bond $2,000 0.18% 400 years $1,447,669,688
6-Month T-Bond $2,000 0.13% 554 years $340,821,694,569
3-Month T-Bond $2,000 0.08% 900 years > $10 Trillion
1-Month T-Bond $2,000 0.04% 1,800 years > $10 Trillion

Source: Bureau of Labor Statistics, U.S. Department of the Treasury, author's calculations.

No, these figures are not misprints; it's just an in-your-face example of what a poor investment Treasury bonds make right now. With the one-year Treasury bond, for example, it would take 400 years of constantly rolling over your compounding investment to double your return. In that period, the real dollar value of $1,000 would be worth more than $1.4 billion – a 99.999% real-money depreciation! If you were purchasing that bond for your descendants to use, you'd have pretty much bought them the equivalent of a soda from a vending machine.

Buy this instead
So what can you do if you're scared to death of these market plunges and you want a relatively safe return on your money that will outpace inflation? Here are three solid ideas instead of turning to Treasuries.

1. Buy necessity stocks
In January, I shared a portfolio of five stocks that could help prevent your portfolio from disaster in case of corrections like the one we're experiencing now. The secret to all five stocks is that they supply a necessary product that sees little weakness in demand when the global economy weakens. As you can see from the dividend-adjusted performance since then, they've done quite well:

Company

Dividend Adjusted Return Since 01/19/2012

Duke Energy (NYSE: DUK  ) 8.3%
American Water Works 4.3%
Chevron (8.2%)
Coca-Cola (NYSE: KO  ) 10.0%
Wal-Mart (NYSE: WMT  ) 10.4%
S&P 500 (2.8%)

Source: Yahoo! Finance, author's calculations.

Despite the market's fall, four of the five companies have decisively outperformed the broader market S&P 500. Wal-Mart has shaken off a bribery scandal and hit a 12-year high on stronger earnings results all while the market has dipped. Duke Energy is also tipping the scales at a new high as its diverse portfolio of electricity-generating fuels (natural gas, wind, and hydroelectric) is keeping its energy production costs low and its margins up. Coca-Cola has been a bottle-rocket in the past four-plus months as it has an easily recognizable brand image and emerging-market exposure that has buoyed stagnant domestic sales. The point is that solid companies that provide necessity goods will tend to outperform over the long haul.

2. Buy high-yield dividend stocks
Just like low-yield Treasury bonds are a bad investment, you also don't want to rush out and grab the highest-yield possible without doing your research. In order to find a dividend that offers a quick payback you need to find companies with strong, sustainable, cash flow that are also in sectors that tend to be resistant to economic downturns. According to CNBC, 55% of all S&P 500 companies have a dividend yield higher than the 10-year Treasury bond, so that is a great place to begin your research.

One company that strikes me as a good example that will outpace the historical average of inflation is AT&T (NYSE: T  ) . Neither AT&T nor Verizon is going to give you exceptional growth, but the cash flow of dividend-paying telecoms is matched by few businesses. With a yield north of 5%, AT&T would crush what you would receive from buying a Treasury bond.

3. Buy a corporate bond
When in doubt, if you absolutely can't get up enough courage to buy stocks, then consider buying a highly rated corporate bond. Microsoft's (Nasdaq: MSFT  ) corporate bonds are rated AAA and its 30-year bonds have a current yield very close to 5%. With $45 billion in net cash and a very stable business, Microsoft's bonds appear to be a strong bet to outperform.

Whatever you do, do something else
The main point here is this: Whatever you do, don't buy Treasury bonds. The trading action in bonds can only be described as speculative with the yields tracing so far below the historical inflation rate that you'd be throwing money away to make a nominal profit.

Do you have a plan to beat inflation? Tell your fellow Fools about it in the comments section below.

If high-yielding dividends are your path to success, then you might appreciate the latest special report from Motley Fool Stock Advisor detailing nine dividend-paying companies, including Wal-Mart, which could help you retire comfortably. Click here to get your free copy.

Editor’s note: A previous version of the bond table in this article contained erroneous figures. The Motley Fool regrets the error.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Coca-Cola and Microsoft. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Chevron, and Microsoft, Wal-Mart, as well as creating a bull call spread position in Microsoft, and a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that believes transparency is always a necessity when it comes to investing.


Read/Post Comments (8) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2012, at 11:51 AM, StopPrintinMoney wrote:

    who is buying all these bonds? the banks?

  • Report this Comment On June 06, 2012, at 12:38 PM, Borbality wrote:

    This stuff is kind of voodoo to me so I'm probably not grasping it completely, but it's my understanding the Fed buys a lot of these bonds. That's essentially what quantitative easing was, right? To keep bond yields low.

    We buy our own debt and owe ourselves a lot of money that we create. What a world.

    Really kind of have to hope in 200 years people look back at this kind of thing as being crazy and hilarious.

  • Report this Comment On June 06, 2012, at 12:57 PM, btukwh wrote:

    Silly article titles keep coming. Must be sweeps week at the motley fool.

  • Report this Comment On June 06, 2012, at 1:47 PM, VolkOseba wrote:

    @Borbality We can already look back at this kind of thing... see: Zimbabwe, Argentina, the Weimar Republic, the Roman Empire... nothing about it is hilarious to me, but it's certainly crazy.

  • Report this Comment On June 06, 2012, at 2:31 PM, BMFPitt wrote:

    I don't think anyone holding 1-month treasuries is planning to roll them over indefinitely.

  • Report this Comment On June 06, 2012, at 2:45 PM, TrackUltraLong wrote:

    BMFPitt,

    Even if they aren't, the exercise was to show how ridiculously overvalued U.S. Treasuries are and what poor investments they make.

    TMFUltraLong

  • Report this Comment On June 06, 2012, at 3:53 PM, eyecolts wrote:

    In what universe is Coca Cola a necessity. I'm sure it enjoys consistent profits, but not because it's a necessity.

  • Report this Comment On June 06, 2012, at 4:22 PM, TMFUltraLong wrote:

    Eyecolts,

    Lol, trust me... If I could I'd eliminate soda completely from the world. But from my article that described necessity products coca-cola beverage products best fit the bill for the "food" category. It's global reach is undeniable and it's earnings are rarely affected by global hiccups.

    TMFUltraLong

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