What Goes Up Must Come . . . Well, You Know

One reason that investing is so challenging -- and so much fun -- is that owning a security that made you look like a genius one year can make you look like a dummy when the world changes the next year.

No, I'm not talking about stocks. I'm talking about long-term U.S. Treasury securities, among the best investments you could have made last year but a terrible investment so far this year because many of the people who stampeded into Treasurys in 2008 have stampeded out in 2009.

You looked like a genius owning long-term Treasurys last year, because "safe haven" investors piled into them, driving their yields way down and their prices way up. (It's Bond Math 101: a bond's yield is its annual interest payment divided by its market price. If the interest payment is fixed, as it is on long-term Treasurys, falling bond yields mean rising bond prices.)

Here are the numbers, from my handy-dandy Bloomberg terminal. Last year, of course, was one of the worst ever for the U.S. stock market. The total return of the Standard & Poor's 500-stock index -- price changes plus reinvested dividends -- was minus 37 percent. Yucko! Long-term Treasury securities, however, did great. The return on zero-coupon 10-year Treasurys was 23.1 percent, and on 30-year zeros, 44.8 percent. (I explain below what zero-coupon securities are and why I'm using them here.)

Now, I'll make these numbers more tangible. If you put $1,000 into the S&P 500, 10-year Treasurys and 30-year Treasurys at the start of last year, you ended up with about $630, $1,230 and $1,450, respectively. The advantage: a stunning 60 percentage points over stocks for 10-year Treasurys, an even more stunning 82 points for the 30s.

But if you didn't adjust your portfolio at the beginning of this year, you've given a batch of that gain back. Through Friday, the S&P 500 had returned 6.1 percent, which isn't fabulous by any means, but has beaten the pants off long Treasurys. Because their yields have been rising, their prices have been falling -- the opposite of what happened last year. The 10-year zero lost 11.9 percent through Friday and the 30-year, 30.3 percent. In other words, 10-year Treasurys have given back 30 percent of their gains from last year relative to the S&P stocks and 30-year Treasurys have given back about 45 percent.

I suspect that Treasurys are going to give up much more than that -- not because I'm necessarily optimistic about stocks, but because I'm deeply pessimistic (as I've been for several years, including 2008) about long Treasurys. I expect their prices to fall, probably quite sharply, as overseas lenders demand higher rates to keep funding our huge federal budget deficits.

There are all sorts of implications to that, but let's skip them for now and stick to the main point. What makes a lot of money one year can lose a lot the following year. Within the past decade, we've seen various red-hot investments turn ice cold almost overnight: tech stocks, telecom stocks, commodities and, of course, houses. Now, long-term Treasurys.

The moral: Don't invest by looking through the rear-view mirror, because past performance is no guarantee of future performance. Sure, the two points in that sentence are cliches -- but that doesn't mean they aren't true.

FOOTNOTE: A zero-coupon debt security, which you buy at a discount from face value, doesn't pay periodic cash interest. Rather, you get the cash all at once when the security comes due and pays off at face value. (That assumes, of course, that the issuer has the ability to pay it off.) I'm using Bloomberg zero-coupon numbers rather than a specific 10-year Treasury note or a 30-year bond to avoid having to figure out how to account for reinvested interest, and to duck other issues that would make comparing stock returns with bond returns more complicated than it has to be.

With research assistance by Doris Burke of Fortune. Allan Sloan is Fortune magazine's senior editor at large. His e-mail address is asloan@fortunemail.com.