Fun with TINA

I’ve heard today’s investing environment described as TINA.  There Is No Alternative.  I don’t necessarily agree that this is the case, but the argument goes something like this:

• US Treasurys yield around 1.50%
• The rest of the world is yielding zero (or less!)
• US stocks yield 2% and the US economy is strong
• Equities outside of the US have sucked for a decade and their central banks have weak hands

Through this incredibly limited view (that no one should use to invest actual dollars), there is no alternative to owning US equities, especially if you are investing for income.  This did get me thinking, though…

Ten Years Ago

Just for fun, let’s take a look at the 10-year Treasury and the S&P 500 as though they are the only two investment choices.  Ten years ago, the 10-year yielded 3.85% and the S&P yield was about 2%.  So $100,000 invested in a 10-year Treasury would pay you $3,850 per year while the S&P would pay about half, $2,000.  Do you invest in the Treasury or the S&P?

You’d get $3,850 every year like clockwork from the US government, but in 2009 everyone expected rates to go up.  A 1% increase in rates would mean an extra $1,000 in your pocket every year, but you’d have to sell your old bond first.  The math says you could probably get about $92,000 for it so you’re really only ahead by about $600 per year (4.85% on $92,000).

The S&P 500 yielded 2% ten years ago, throwing off about $2,000 on a $100,000 investment.  However, the economy is still rattled from the Great Financial Crisis and the guy on TV says the recent stock market rally is a dead cat bounce.

Today

$100,000 invested in a 10-year Treasury ten years ago would be worth… $100,000.  If you held it the entire time, Uncle Sam would have paid you $3,850 last year.  The S&P 500 would be worth $370,000 if you had reinvested the dividends, but you didn’t so it’s only worth $300,000.  Last year’s dividends would have been about $6,000.  I think as far as income goes, the bond paid more, but on a total return basis, the S&P is the obvious winner.

No one should invest solely on the above information, but I think it’s interesting to look at when so many people have a thirst for income.  There’s a school of thought that you should never take from principal.  However, if you invested $100,000 in SPY ten years ago, reinvested the dividends, and withdrew $3,850 every year, you’d still wind up with $291,000 at the end.

On the Other Hand…

Of course it can work the other way, too.  What if you invested $100,000 in the S&P before the crash?  While the dividend didn’t get cut in half like your principal would have, earning 3.38% on half your initial investment might make you wish you had $100,000 in Treasurys earning 4.5% instead.  The S&P still would have come out ahead after ten years, but it would not have been pleasant.

TINA

It’s just really interesting to me that the S&P’s yield is a pretty steady 2% , but compounding can turn that 2% into serious walking around money.  Meanwhile, if you stuck with the 10-year, you’d be getting less than what you can find in a reputable online savings account.

As for TINA, it only seems to make sense in the short-term to me.  That’s not investing, though.  It’s speculating.  So sure, TINA for gamblers.  For someone who doesn’t monitor twitter for trade ideas, there are alternatives – a diversified portfolio that is diligently rebalanced, for example.

If this back of the envelope math really has a lesson to teach, it’s that diversification pays a peace of mind dividend that might be just as valuable as cash.  When your portfolio doesn’t rely on predicting rates or stock market returns, you sleep better at night.