How often does a 1% I-Bond beat the S&P500?

[intercst]

How often does a 1.00% I-bond beat an investment in the S&P500 over a 30-year period?

Here's the answer.

http://www.retireearlyhomepage.com/ibond30.html

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[wabmester]

What prompted this comparison? It reminds me of the movie "Bambi Meets Godzilla."

Who in their right mind would hold a 1% i-bond for 30 years? (Even ignoring the fact that nobody in the world has held one for more than 6 weeks so far.)

A 5-year comparison might be interesting. As would a 30-year 2.5% TIPS comparison. And in the latter case, it only makes sense to look at SWR and not total performance since volatility + withdrawals is what can wipe you out.

 

[hocus]

What prompted this comparison?

I presume that the general question being raised is whether non-stock investments are ever a reasonable long-term alternative to stocks.

Here's a link to a post from the SWR board in which JWR1945 comes to some surprising findings re the historical performance of commercial paper. This post provided me with some historical perspective that I lacked before reading it.

http://nofeeboards.com/boards/viewtopic.php?t=2234

JWR1945: "From this data, we may be able to explain, in part, why calculations from the early 1871-1920 period have behaved differently than later years. Look back into the years just before the twentieth century. Commercial paper portfolios by themselves supported inflation matched withdrawal rates in excess of 6%....Commercial paper seems to have gotten a bum rap. It has done quite well except for retirements that were started during the depression."

 

[unclemick]

JWR also mentions William Jennings Bryan - Cross of Gold. Different era - gold standard, Inflation low or falling, ?1913 ? central bank, and then WWI toward the end.

We 'may' get to a period (post WWII) where 'honest brokers' calculate the 'true' inflation rate and give bondholders a better shake.

Meanwhile, I shall continue to read the studies put forth here and elsewhere while leaning on my four legged table (pension, dividend stocks, to be SS, and my trusty 60/40 balanced index). Research on. And here's to De Gaul and the Norwegian widow. O.k, o.k. - Bogle, Bernstein and his buddy Angus Maddison over in Scotland.

 

[Roger_R]

Who in their right mind would hold a 1% i-bond for 30 years? (Even ignoring the fact that nobody in the world has held one for more than 6 weeks so far.)

Perhpas a tongue in cheeck comment, but of course I bonds cannot be redeemed for one year.

 

[intercst]

What prompted this comparison?   It reminds me of the movie "Bambi Meets Godzilla."

Who in their right mind would hold a 1% i-bond for 30 years?   (Even ignoring the fact that nobody in the world has held one for more than 6 weeks so far.)

A 5-year comparison might be interesting.  As would a 30-year 2.5% TIPS comparison.  And in the latter case, it only makes sense to look at SWR and not total performance since volatility + withdrawals is what can wipe you out.

The article from the Journal of Financial Planning that ***** misconstrued:

http://www.fpanet.org/journal/articles/2002_Issues/jfp0202-art10.cfm

What does this mean for financial planners? First, do not use current P/E ratios to predict short-term returns. Second, financial planners should adjust their long-term expected returns to reflect the reality of current market conditions. If current P/E ratios are high, expect lower long-term average returns and if current P/E ratios are low, then expect higher long-term average returns. Finally, if P/E ratios are at historically high levels, expect long-term average returns on stocks to be low but above those of long-term T-bonds and T-bills. So the best advice to give investors when P/E ratios are high could well be to expect lower returns but still stay with stocks

During periods of high valuations and low, good times and bad, stocks out perform bonds over the long run.

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[mickeyd]

Over a 30-year period nothing beats the stock market.

 

[cute fuzzy bunny]

Two points:

All of this is true historically, we dont know what the future holds.

And i'm betting that not one of us, in the face of a long bear market, would have the balls to hold the line. Far better people "lost" money in the great depression and in the 70's-80's debacle because they lost the faith.

 

[Cut-Throat]

And i'm betting that not one of us, in the face of a long bear market, would have the balls to hold the line.

That is why I think a 'plan' is much better than a 'feeling' for market timing. remember TH as the market goes lower, the risk decreases.

 

[unclemick]

True - I was working and DCA into the market though the 'flat' 1966-1982 period. The minor dips in 1987 and 2000 - 2002 hardly qualify as testing a balanced portfolio or asset allocation. A nice 5-6000 point drop in the DOW along side a rising interest rate would put my div. plus 1% plan to a reasonable test. I suspect the risk premium (not the calculated inflation adjustment) portion of I bonds/TIPs would reflect market uncertainty.

 

[earlyout]

hRe: How often does a 1% I-Bond beat the S&P500?

There was an excellent article on how our minds cause us to react/act in certain predictable ways. One of the points in the article was our need to predict the future. We take certain random events, that we see and "determine"a pattern. This pattern works for a while and causes overconfidence. Overconfidence causes less diversification (why diversify when we know what will happen?), then when the pattern is broken we panic and make more poor decisions.

When we diversify our investments we are admitting we do not know the future, but have planned for the future in a rational manner (based on history). When we diversify we also put a damper on making wrong decisions (i.e. fear based ) because we have already acknowledged the future is uncertain and we have invested with that purpose.

Someone who is not diversified ( a few exceptions) and or tries to time the market is really saying they know what is going to happen.

 

[haha]

Re:  hRe: How often does a 1% I-Bond beat the S&P5

Someone who is not diversified ( a few exceptions) and or tries to time the market is really saying they know what is going to happen.

I think this is not a fair statement. For example, someone who at the present time may be 100% in short term fixed instruments may only be saying that to him, it is likely that the future will offer better opportunities. Likewise, isn't someone who picks any normal allocation, say 70% stocks, also saying that he(she) knows what is going to happen? He is implicitly saying that 70/30 is a plan for all seasons, not to be tempered by other considerations.

Mikey

 

[unclemick]

At some point anything 'could' become a buy. 7% real interest sans the inflation adjustment would put I bonds in the buy catagory for my hobby portfolio. Rational - 3% inflation over very long (30 yrs) plus 7% yield would be a wash against the oft quoted 10% on stocks. Heh, heh - jump in folks - at what price would you consider I bonds and why.

 

[10sPlayer]

at what price would you consider I bonds and why.

At 4% + inflation I could then withdraw 4% + inflation and have a 100% SWR. I would consider going to 100% I bonds at that rate.

 

[Roger_R]

At 4% + inflation I could then withdraw 4% + inflation and have a 100% SWR. I would consider going to 100% I bonds at that rate.

That's about my read, too as a new learner. With a little bump in interest rates, maybe the new 20 year TIPS will actually come close.

Actually a comparison of I Bonds to stocks is interesting, but sort of like saying which is more useful, a refrigerator or a freezer. I just maxed out my Ibond allowance for the year because it's about the best secure thing I could figure for return and only tie up money for a year or two. I have plenty of other things in my freezer for later.

 

[wabmester]

I-bonds are unique and pretty interesting investments.  They have zero volatility, an inflation adjustment, and you get to pick your own maturity date -- anything from one year to 30 years.   And they have some tax advantages to boot.

If you're looking for preservation of capital, they're hard to beat.    If you're looking for growth, they can't compete with stocks.

Personally, I'd buy all of the i-bonds the gov't would let me have at any fixed rate over 2%.

The interesting little bit of data that apparently prompted this comparison is that if you invest in stocks at high P/E levels, your 10-year return could be as low as 1.24%, and generally they found the risk premium to be only 1.32% over t-bill rates (which currently have a negative real yield).   So, in some cases, stocks give you the worst of both worlds: low returns and high volatility.   This is obviously a Bad Thing for any investor, but it's murder to a retiree.

The stock market is currently in a high P/E range according to the paper (high > 15).

 

[John Galt]

I dusagree wabmeister! Your ten year return on stocks
"could be" a huge negative, and there is no limit on
the bottom. You are relying on history. It might
repeat. Maybe not...........

John Galt

 

[unclemick]

The Vanguard Target Retirement Income series holds almost 25% inflation protected and 20% stocks so they obviously believe it smoothes the ride and helps with inflation erosion.

Now - I believe both stocks and real estate are high right now - BUT I'm dinking around looking for bargins - and I suspect John G. 'might' be doing the same for real estate.

I bonds may never 'beat' stocks but as capital preservation against inflation, they're an overweight bet in Vanguard's strategy for an income portfolio. I wonder what retirement span they're using.

 

[cute fuzzy bunny]

I would imagine they're targetting (!) that for the folks that have just or recently retired at the common age segment of 62-67, want low volatility, and probably have a 15-25 year horizon for withdrawals.

Atypical of the usual FIRE candidate?

But with stocks (arguably) at a high valuation level, dialing down the ownership level and dialing in some inflation protected securities may be prudent.

Historically having less than 20% stocks in a predominately fixed income portfolio increased volatility and reduced returns. Same with 20% bonds in a predominately stock portfolio. Historically.

We're smack in the middle of why I still like vanguards wellesley fund. 40% high dividend paying stocks and 60% short to intermediate term bond. Nice yield, low volatility...not much inflation protection per se, but with a nearly 11% annualized return since 1970, I dont know if I need any. Dress it up with some foreign stock, some emerging market, some REIT and a few other baubles and it works for me...