This article was published on 26 November 2011. Some information may be out of date.


  • Are shares still the best long-term investment, despite recent results?
  • Investing in bank term deposits has its own risk — that of inflation eating into returns
  • Older job applicants might want to play down their age on their CV
  • Volunteering overseas an option for couple in their 60s who can’t find jobs

QI recently saw on Bloomberg an article that says the return on long-term US government bonds has beaten the return on US shares for the last 30 years, and that is the first time that that has happened since the Civil War.

It seems that the financial environment is most unusual at present, as common sense would suggest that because shares are more risky they should beat bonds.

It might be worthwhile bringing to the attention of your readers that shares sometimes require a very long-term perspective, but this doesn’t mean that readers should favour bonds. Indeed with US bonds having done so well in the last 30 years this might have made them expensive.

The flip side to that view is the well rehearsed idea that we might be “turning Japanese”, and that ten-year bond yields could fall from the current 2.2 per cent to the 1.0 per cent level typical in Japan, if the economic environment stays depressed long term. Who knows?

Anyway what the figures do show is that you can’t take anything for granted these days, so it is best to have a dollar each way.

AIn the Investment Olympic Games, it’s anyone’s guess which one out of government bonds, corporate bonds, shares, property or term deposits will win the short one-year race. But by the time we get to the marathon, expectations are much clearer. Shares tend to be the favourites, with property also a main contender.

Once in a long time, though — in this case 150 years — an outsider wins the marathon. This time, it’s US government bonds.

It’s not as if shares did badly. The article you quote tells us that, over the 30 years, the average annual return on shares was a highly respectable 10.8 per cent. A $1000 investment in shares in 1981 is worth $21,700 in 2011. Even after adjusting for 3 per cent inflation, it’s worth almost $9000.

Meanwhile, though, US government bonds have returned an annual average of 11.5 per cent — astonishing for a low-risk investment. How come?

It’s all about interest rates. Back in 1981, the interest on these bonds was just under 14 per cent. Since then, it’s dropped steadily — partly because of central bank moves to control inflation — and is now around 2 per cent.

Let’s say you want to buy a 10-year bond. Newly issued bonds are paying 2 per cent, but you could also buy a bond issued several years ago that pays 6 per cent. Of course you would prefer the latter. In fact, you would be willing to pay considerably more than the face value for the 6 per cent bond.

That means that the person selling that 6 per cent bond would make a capital gain on it — receiving more than they paid for it.

With interest rates on US bonds dropping so far, investors have made huge gains on them over 30 years. Hence the 11.5 per cent return.

Could this continue? Well, as you say, interest rates could drop to Japanese levels, but they couldn’t go much lower. And that wouldn’t be a big enough drop to bring large sustainable capital gains.

As finance professor Jeremy Siegel says in the Bloomberg article: “The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform. If you missed the rally in bonds, well, then that’s it.”

So — while it’s hard to argue with your comment that “you can’t take anything for granted these days” — I think having a dollar each way is a bit extreme.

If you don’t need the money for more than ten or twelve years, and you can cope with volatility, it’s still a good idea to invest more in widely diversified shares, and perhaps property, than in bonds.

While shares and property are riskier, in one sense they are less risky, because they provide some protection from inflation.

As Mark Lister put it in his column two pages after mine last week: “Even at relatively modest levels, inflation can devastate savings. Long-term investors need to recognise the risk of ignoring growth assets in favour of the havens of fixed-interest and bank deposits.”

He added, “The best strategy is to have at least a portion of your savings in real assets that can grow their earnings to keep pace with inflation. This includes property and good-quality equities (shares), both of which are difficult to replicate or print more of and both of which should be able to pay an ever-increasing dividend or rental stream.”

QThe JB Were Private Wealth Index shows that “a diversified portfolio of shares (New Zealand, Australian and global), fixed income investments (cash, NZ Bonds and offshore bonds), property and alternative investments” returned 2.28 per cent a year over the last five years.

Would this not mean that “buy and hold” and “a mixed portfolio over many stocks with a proportion of cash and bonds” is — in the new paradigm — an outdated concept?

In each of the five years, I would always receive more than 2.28 per cent interest — often considerably more — in a simple term deposit in a safe, major bank (safe because in the real world governments will not let banks fail, or will at least ensure the average person’s deposits are not lost).

In point of fact, given that in one of the past five years I could have fixed for three years at above 6 per cent a year, my average is considerably higher than 2.28 per cent.

The world in which one can invest in a “diversified portfolio” is, it seems, actually getting riskier.

This is not good news for the financial advice industry, which clips the ticket of managed diversified funds (up to nearly half of returns). But to the person in the street, term deposits are the safest, most secure and simplest place to receive a return above inflation, and a good night’s sleep.

AI agree that if you are investing for a couple of years or less, bank term deposits are — and always have been — the way to go. In any other investment, there’s too big a chance value will drop over a short period.

But I disagree for longer-term investing. Firstly, although investment markets have been turbulent in recent years, I don’t buy the talk of a “new paradigm”. I’ve heard it too many times before. As economist J.K. Galbraith said, “Little is ever really new in the world of finance.”

Debt levels rise and fall, and employment rises and falls, but most people still work and buy goods and services, creating jobs for other people and generating returns on shares, bonds and property. It’s not as if we’ve all taken up sackcloth and ashes.

What you’ve done is pick out an unusually bad five-year period and assume it will continue.

In the graph you forwarded to me, the JB Were index almost quadrupled in the 15 years before the latest five years. That means annual returns averaging almost 10 per cent — well above bank term deposits. And, on average, we would expect a higher performance in the future. The way the markets work, investors usually receive higher returns for taking higher risk.

Before you move your long-term savings into bank term deposits, read Mark Lister’s comments in the previous Q&A. Inflation may be as big a worry as market volatility.

QI would like to help your couple in their sixties who couldn’t find work — in the column two weeks ago. In particular I would like to help the husband.

I am 66 myself and was in very much the same position as your man in 2008. After a few near misses at jobs but no success, I decided my CV needed a change. I removed all the dates on my education and removed my first 10 years of experience from my CV. I took my age off my Facebook page. I never stated my age in my CV and it should be of no concern to a prospective employer anyway.

I am a fitness fanatic so I look a bit younger than some my age. I got a really good job and don’t plan to leave it any time soon.

I think people often blame old age for not getting a job when that is not really the problem. If you have let yourself go physically and don’t keep up with your field of expertise and dress like a bum, then it is time to buy some running shoes, take some evening classes and get some new interview clothes.

My advice to your man is to do the same as I did. In fact, I would like you to give him my contact details and I will help him out at no charge. We could get together for a coffee. He certainly will not get a job if he is not applying.

AI’ve forwarded your email, along with others from people who made similar requests. Thanks for your offer of help.

On “misting over” your age in your CV, I fully approve — as long as you don’t do anything misleading. Removing your first years of experience might be seen as dishonest. But I don’t see why you can’t lump several early jobs together under a general heading, without dates. And yes, no need to date your education.

Having seen a few middle-aged people become rather gaunt as they exercised more, I’m not sure fitness necessarily makes you look younger. But it probably makes you feel younger, and that may be more important.

And I agree about having smart interview clothes — although I somehow doubt if our couple would be slack in that area.

QTo take your suggestion to the couple in their sixties about volunteering one step further, how about they look at volunteering opportunities overseas?

This could be a great way to use their skills, and do something with a bit more interest and challenge. There is only a modest payment to cover living expenses in the country concerned, which makes it difficult for younger people still paying off a mortgage, but this couple could rent out their house in New Zealand to earn extra income.

AExcellent idea. I understand that you need to have certain skills to be eligible for this, but the man has management and engineering qualifications and his wife probably has something good to offer. Could be the adventure of their lives.

We’ll run more readers’ suggestions for the couple next week.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.