This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Flight to Safe Treasuries Might Not Be So Safe

BERKELEY HEIGHTS, N.J. ( TheStreet) -- Recent market volatility has investors heading out of equities and into so-called safe investments such as 10-year U.S. Treasuries. Operation Twist by the Federal Reserve has dropped 10-year treasury yields below 2%. As I write this, the yield on 10-year Treasuries is a meager 1.88%.

For many investors that sounds great, given current equity market turbulence. Risk-averse investors often fail to account for inflation, though.

Your 10-year Treasuries aren't as safe as you think -- while your money is locked up, inflation is stealing it away.

Assuming a 3% inflation rate and a 1.88% 10-year treasury yield, investors are getting a negative real return of -1.09% per year. And if the investor needs to sell before the maturity they are likely to take a principal loss due to rising interest rates.

Negative real returns are bad because they result in a loss of buying power. For example, assuming 3% annual inflation, $100 in 10-years will buy only $76 of goods and services. The $100 really needs to grow at 3% just to keep up with inflation.

So what investment historically has best kept up with inflation? That's right, the answer is good old equities. The chart below illustrates the historical long-term real return from 1926 to 2008:

The historical returns above for T-bills and government bond returns are not likely to be repeated over the next 10 years due to the already low level of interest rates. Meanwhile U.S. equities as represented by the S&P 500 as of the end of September trade at roughly 10.6 times forward earnings. From a longer-term perspective, stocks are much more compelling than U.S. Treasuries.

Clearly, investing in 10-year U.S. Treasuries may feel good now but it is not so safe when viewed through the lens of real return. Investors would be wise to have a well diversified investment portfolio that gives them a much better chance to stay ahead of inflation on a longer-term basis.

>To submit a news tip, email: tips@thestreet.com.

RELATED STORIES:







Follow TheStreet.com on Twitter and become a fan on Facebook.

Michael Maye is the founder and president of MJM Financial Advisors (www.mjmfinadv.com), a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors (NAPFA) and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's "Biz Brain" and "Get With the Plan" articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,284.01 +18.02 0.10%
S&P 500 2,010.43 -0.93 -0.05%
NASDAQ 4,575.40 -18.0250 -0.39%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs