The perception of government bonds as 'safe' is challenged by history. In the 35 years following WWII (1945-1980), a period of inflation and financial repression, investors in most global government bond markets saw the real value of their capital decimated.
Contrary to its perceived safety, holding cash is a losing proposition over the long term. Deutsche Bank's historical data over 200 years shows a global real return of -2% per year for cash, eroding purchasing power significantly.
For most of history, gold was simply money and offered minimal real returns (~0.4%). Since the global move to a fiat system in 1971, where currency is backed by nothing, gold has performed exceptionally well as an alternative to paper money.
In a world of high debt and low organic growth (from demographics and productivity), the only viable path for governments is to ensure nominal GDP grows. This will likely be achieved through inflationary policies, making official low-inflation forecasts unreliable over the long term.
Since leaving the gold standard in 1971, the default government response to any financial crisis has been to expand the money supply. This creates a persistent, long-term inflationary pressure that investors must factor into their strategies, particularly for fixed-income assets.
An investor's lived experience can be a poor guide to long-term market realities. For example, someone who started their career after 2009 has only known a US stock market that consistently rewards dip-buying, a pattern not representative of broader history.
While innovations like AI are disinflationary in a vacuum, history shows this effect is consistently overwhelmed by expansionary monetary policy. For over 200 years, central banks have created 'man-made' inflation, meaning investors shouldn't count on technology alone to keep prices stable.
Across 200 years and 56 countries, the single most important factor for long-term investing success is the starting valuation. Buying portfolios with low P/E ratios or high dividend yields consistently outperforms buying expensive assets by 3-4% annually over the long run.
When markets are top-heavy and expensive, like in 2000, the concentration risk of market-cap weighting is severe. In the 13 years after the dot-com peak, while the S&P 500 went nowhere, its equal-weighted version doubled, highlighting a powerful de-risking strategy.
Investors expecting an 'average' 8-10% return each year are often mistaken. Historical data shows returns are not normally distributed; the most common bucket of annual performance is actually 15-20%, followed by 30-35%. Years with average returns are relatively rare.
Despite numerous world-changing innovations over 150 years (electricity, PCs, internet), US stock market valuations (via CAPE ratio) have only been higher once, in 2000. This implies an extreme level of optimism is priced in for AI's impact on corporate profits compared to historical tech booms.