????That brings us to Washington. Those of us who longed for divided government to stop politicians in our nation's capital from going to extremes in either cutting or boosting taxes and regulatory levels, never wanted things to be this divided. We don't have divided government, we have dysfunctional government, at a time we can ill afford it.
????With all this bad stuff going on, how do you wrap your head around investing? By doing your best to pick investments whose odds are in your favor -- as opposed to investments that are popular and have already had a big run-up.
????Three years ago I said in Fortune's 2009 Investor's Guide that buying the U.S. stock market was a really good idea for someone with financial staying power and a five- to seven-year time horizon. I considered that an easy call -- though it wasn't easy to summon up the nerve to do it, given the gloom and doom prevailing at the time. The S&P was at 870 when I wrote, fell to 673 in March 2009, and has since almost doubled.
????But because the broad U.S. stock market is substantially higher than it was three years ago, it's riskier. Then, I considered it a can't-miss. Now it's a who-knows?
????Okay. Before I tell you what you might consider doing with your money, let me tell you what I think you shouldn't do (unless you're a pro, in which case you presumably need no advice from me). Treasury bonds? Forget them, unless you want to lock up your money for years at laughably low rates and are willing to suffer substantial losses. Long rates are artificially low because the Fed has been buying tons of long-term securities to force down rates, and safety-seeking capital has poured into Treasuries too. But someday the Fed will dial back, the flight capital will leave, and rates will rise.
????Let me give you a small example of what even a modest rate rise could do. Say you own a 30-year Treasury currently yielding 3%. If rates rise to 4% a year from now, your bond's market value will drop 17 points -- almost six years of interest. Rates have to fall to 2.2% for your bond's value to rise 17 points. What are the odds of that happening?
????In last year's Investor's Guide, my colleague Shawn Tully said what I'm saying now. I totally agreed with him. But because of the aforementioned purchases, yields on long Treasuries have fallen since then, and their market values have risen. In fact, for the 12 months ended in November, long-term Treasuries were the best-performing asset class of the 48 tracked by Aronson Johnson Ortiz, a Philadelphia money manager. The Barclay's long Treasury index returned a huge 21.3%, triple the 7.1% return of all U.S. stocks. But for 20%-plus returns to continue, long Treasury rates have to fall close to zero within a few years. Not likely.
