Why investing requires faith

Market believers do not profess to know the economy's future, nor the wisdom to time markets – what they do know is that, over several decades, equities always win

John Rekenthaler 16 April, 2019 | 5:00PM
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Purchasing long-term investment assets requires trust. Doing so involves handing over a valuable possession – that is, money – with no guarantee that the sum will be returned in full as expressed in real terms, except for certain inflation-protected securities. Investing is an act of faith.

Today, 30-year U.S. Treasury bonds yield 2.9%. Their prices will sink if interest rates rise only moderately by historic standards, to 5%, even if that increase doesn't occur for 15 years. There is no escaping the fact: interest rates must remain low by post-World War II standards for high-quality bonds to succeed.

Unlike bonds, which unambiguously suffer from higher rates, companies sometimes benefit from higher rates – if they receive more income from their investments and/or loans. In addition, companies can adjust what their businesses do, while bond payments, of course, are fixed.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is Vice President of Research for Morningstar.

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