Steady and Consistency Can Win the Race

by · 17 comments

Not convinced that consistent improvement is key to success?

Consider the following chart that illustrates a $1,000 investment in 30-year treasuries vs the S&P 500 at the beginning of 1990. During the twenty year period of 1990 – 2009, investing in treasuries will net you a total of $4660.96, assuming you compounded all of your interest (based on 8% on 1/2/1990, the first trading day that year). On the other hand, investing in the S&P 500 would give you $3,154.93.

I expected treasuries to win even before I looked this up (after all, 8% is a good return) but I definitely didn’t think the gap would be this wide. What’s even more shocking is that in 2007 (before any credit bubble popped and we were all happy with our stock portfolio), the performance of the S&P 500 only edged out the treasury investment by a tiny bit ($4155 vs $3996).

So What Can You Learn?

  • Steady Can Win – Steady hasn’t won for long stretches of time in the past 2 decades, but I am pretty sure that it will win more often than not in the next 5 years as it will take quite a bit of time before the S&P catches up.
  • Steady May Take Years (or Decades) to See Results – Steady always starts off slow, but the positive momentum is quite powerful when time is on your side. That’s why 401ks all start out small but can grow to have millions of dollars. So stay the course.
  • Steady Could be Embarrassed, and For a Long Time – I’m sure 1996 was the year when people started making fun of their buddies who invested in treasuries. You only get 8% a year? My account is already 15% higher than yours. Notice also that it could’ve went on for a great many years, and it would be difficult to bear around the end of 1999 when everybody probably thought they were stock picking geniuses. Being steady is more difficult, but it could also pay, as you can see.
  • The Steady Spends Less – A side benefit of being steady is that you probably spend less along the way too. Those who see their investments grow quickly are more likely to spend more in the good years, and have even less to built on when times are tough.
  • Steady is Ultimately Happier – Additionally, huge swings are tough emotionally. There’s really a hidden beauty in stability, even if it’s less exciting and seemingly less profitable.

There is a big caveat with steady though, because steady needs to be good enough. 8% is great, and 6% is good too. But if treasuries offered a 2% return for example, then volatility may be worth it.

The Real Lesson

This seems like investing advice, but it’s much more than that. Almost every time I talk about taking the conservative approach, someone would argue that it’s silly when the numbers aren’t on your side. You know what I’m talking about right? An idea like paying off your mortgage early almost never make sense mathematically. But as I always say, no one filed for bankruptcy being debt free. On top of that, in some rare cases, the reality can actually prove that mathematical models have its holes too.

Not every sure thing is so sure, because life is unpredictable. The more dependable your investments are, the easier it is to actually live your life. Find a relatively stable investment that’s good enough, and you will be much happier in the long run.

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

Money Saving Tip: An incredibly effective way to save more is to reduce your monthly Internet and TV costs. Click here for the current Verizon FiOS promotion codes and promos to see if you can save more money every month from now on.

{ read the comments below or add one }

  • kashif says:

    Very good and helpful for me and I will tell him to others thanks for sharing.

  • Adam@RabbitFunds says:

    Great article. I’m usually an aggressive investor, happy to take the risk of the market. But it doesn’t always make sense. There is a certain reality to “good enough” as you pointed out so well in your article. Especially when good enough is safer.

  • Daddy Paul says:

    You really make a good case here for asset allocation and rebalancing.

  • CD Rates Blog says:

    Originally, I was going to put a rate and even an example, but then realized I was focusing on what I do and how I feel too much.

    However, 6% was the number I was thinking. It seems that given almost any time frame an average rate of return of 6% would be good.

    But, everyone might have their own number. The key is don’t be greedy, know your number, when it comes, load, shoot, and lock it in.

    cd :O)

  • marci says:

    Cool on the audio – they can read along with it themselves then also.

  • marci says:

    Thanks for the info -Glad you looked it up. – but each family of grandkids actually got a real old fashioned BOOK of Aesop’s fables from Grammie. Plus one at my house. Much nicer for bedtime stories reading from a book. Ok – so some of us are really old-fashioned 🙂

    • MoneyNing says:

      Ah yes. Books are always good, but the website actually has audio too, which may or may not fit your needs (for example, you might think that YOU reading the book to your children is part of the fun) 🙂

  • CD Phi says:

    I couldn’t agree more with you… I’d much rather be playing the conservative game that will help me win in the long-run rather than taking extreme risks that I’ll end up regretting. Definitely a life lesson.

  • marci says:

    Slow and steady wins the race….. an OLD Aesop’s Fable… but it’s old because it’s true.

    By the way, hope you read Aesop’s Fables to your daughter… a lot of GOOD life lessons in them 🙂

    • MoneyNing says:

      Good suggestion. I did a quite check and there’s actually a website with all its fables online, aesopfables .com if you are interested in using them for your own grandchildren 🙂

  • CD Rates Blog says:

    Did you use 8% for the whole time-frame? I do believe slow and steady can win “long distance” races, but I don’t believe you can use an 8% return for the whole time frame. Treasuries certainly aren’t paying 8% at this time.

    cd :O)

    • MoneyNing says:

      I did use 8%, because on Jan 2, 1990, you can buy a 30-year treasuries note for 8% (and you will still be getting 8% until 2019). Actually, in the 1970s, you can buy a 30 year treasury for 12% or more.

      I got the rates while searching online, and I read in other places about these rates that tells me the rate I used is correct (or at least approximately correct if the source is wrong). In a way, we missed out because we all could have been earning a totally safe 8%.

      Of course, there’s no “automatic investing” with buying a 30-year treasury up front but that’s not quite what this article is about.

      • CD Rates Blog says:

        So maybe part of the lesson is also not to be greedy, but don’t be foolish either. Locking in a 30-year treasury at this point, may not be a good investment.

        A bigger question is what is a good rate of return? When you can answer that question and you find the rate, don’t be greedy. Lock it in and don’t look back.

        cd :O)

      • Blogging Banks says:

        Well, theoretically one coudl have purchased U.S. Treasury Zero Coupon Bonds in 1990 when they were yielding whatever rate, and it would have been compounded at 8% annually for you.
        Right now 30 year treasuries yield 4.50% to 4.75% for zero-coupon treasury bonds. I would say that 4.5% is a pretty decent return. While everyone has been worrying about inflation/deflation etc, bond investors keep receiving their interest coupons every 6 months. I try to have at least 25% of my networth in long-term US treasuries.

  • FFB says:

    Wow. I think we’ve heard the whole “stocks win out over the long run” argument for so long that we assume it’s the better investment. We’re talking two decades here and treasuries win out. I’m not giving up on stocks but this makes a great argument to diversify for sure.

Leave a Comment