As far back as we have a recorded history, we see rulers, even the most despotic ones, claim that they protect common people. Usually, that does not work well for common people.
The protection of common people is the excuse for the current government regulation of financial advising. However, our bureaucrats do not seem to do a good job—or, at least, they do not do a good job for common people. One glaring problem is the promotion of fixed-income bonds (the most common type of bonds) as safer than stocks, despite the fact that the dollar is not backed by gold or another commodity. For example, on Vanguard’s mutual fund website, we can see that stock funds have the highest risk ratings (4 and 5), while bond funds, especially short-term bond or money-market funds, often have the safest risk ratings (1 or 2).
Yes, people are more certain about how many dollars they will get from fixed-income bonds than from stocks. However, people are very uncertain about what they will be able to buy with those dollars. These bonds do not provide any protection from government devaluation of the dollar and inflation.
On the other hand, common stocks provide some protection from inflation. That protection is not perfect, as it is hard for firms to make good decisions in an inflationary environment. Moreover, the real value of cash and fixed-income securities is reduced by inflation. However, companies also have assets in which the dollar value tends to increase with inflation.
To gain a better understanding of risk, I compare investment in the stock market vs. investment in short-term bonds from 1974 to 2023. The current monetary system, which makes it easy for governments to devalue their currencies, has existed since 1974. We abandoned the dollar convertibility to gold in 1971 and abandoned the Bretton Woods system governing the exchange of currencies among major countries in 1973.
As short-term federal government securities are rated as safest, I first look at investment in 3-month Treasury bills (short-term bonds). For the stock market, I examine the performance of Wilshire 5000 Total Market index (a broad stock market index). All data are from the Federal Reserve Bank of Saint Louis Economic Data website obtained before they discontinued reporting the Wilshire 5000 Total Market index data in 2024.
I compare using simple strategies. First, at the beginning of 1974, I invest the same amount in 3-month Treasury bills (as they mature, I reinvest in the same new securities) and in the Wilshire 5000 Total Market index (or stocks represented in that index) and hold them for five years. Then, I repeat the same strategies at the beginning of each year after 1974. This gives us 46 comparisons of the two strategies. In 38 of those 46 cases (82.6 percent), investment in stocks outperforms investment in Treasury bills. Moreover, in the worst case for stock investors, the value of investment in Treasury bills is 28 percent higher than the value of investment in stocks. In the worst case for bond investors, the value of investment in stocks is 159 percent higher than the value of investment in Treasury bills.
I also examine investing for ten, fifteen, and twenty years. As the investment horizon increases, investment in Treasury bills looks even worse. When investing for ten years, in 39 of 41 cases (95.1 percent), stocks outperform Treasury bills. When investing for fifteen or twenty years, stocks always outperform Treasury bills.
Investing in 10-year Treasury bonds (estimated using data from the same website) instead of 3-month Treasury bills yields similar main conclusions. I examine ten-year and twenty-year investment periods as this allows me to keep 10-year bonds until they mature and then reinvest in the same new securities (the same strategy as for 3-month Treasury bills). When investing for ten years, in 37 of 41 cases (90.2 percent), stocks outperform Treasury bonds. When investing for twenty years, stocks always outperform Treasury bonds.
Looking at this data, it seems strange that the government-approved recommendation is to invest a significant percent of money one saves for retirement in bonds and to increase the preference for investing in bonds as retirement gets closer.
Socialist/progressive governments claim to redistribute wealth from the rich to the poor, but this looks more like the transfer of wealth from deserving common people to undeserving bureaucrats and their friends. The main reason for inflation and the destruction of the real value of fixed-income investments is excessive government spending supported by a much higher-than-needed money supply. Government spending is also supported by government borrowing (e.g., selling Treasury bonds and bills). That illustrates a serious conflict of interest between common people and bureaucrats.
When private firms and financial advisors can choose how they advise people, and government instead focuses on protecting people from the use of fraud and force, each person can easily switch to another financial company or another financial advisor if they want to. Bureaucrats do not face the same discipline. Common people are much better served by free markets than by government bureaucrats.
Dr. Dalia Marciukaityte is an associate professor of finance at Illinois State University. She is also a policy advisor for the Heartland Institute.
