Bonds Outpacing Stocks This Century

[Markola]

Investors are enchanted by stocks’ unique ability to grow, grow, grow. Turns out, it’s equally important to not fall, fall, fall.

Portfolio 1 VBMFX = Vanguard Total Bond Index Fund
Portfolio 2 VFINX = Vanguard S&P 500



Maybe the safest and best strategy for a long term, buy and hold investor is to set the allocation at 50/50 and leave it alone?

 

[audreyh1]

Nice total return graphic!

 

[statsman]

A 50/50 AA with yearly re-balancing would be an interesting comparison. I suspect if you were DCA'ing during any part of the past 20 years, the stock only or 50/50 yields would look better than the bonds only yield.

*-speaking as someone who has been bonds/TIPS fund and cash only since early 2008. Our break even date was early in 2017, and it kind of shows in those two yields.

 

[Markola]

Thank you both. Here is the same graphic with a 50/50 Portfolio #3 added. I ran these on Portfolio Visualizer. It assumes annual rebalancing and reinvestment of dividends and interest.

 

[Markola]

Statsman , Ok, I’ll play! This third time I added a $100/year contribution for the 20 years. Again, the 50/50 Portfolio #3 had the highest compound annual growth rate. Fascinating, no?

 

[statsman]

Thanks for the charts. Interesting information. It it weren't for the last six weeks, the bonds only portfolio would be lagging by quite a bit even after post 9/11 and 2009.

 

[audreyh1]

Thanks for the charts. Interesting information. It it weren't for the last six weeks, the bonds only portfolio would be lagging by quite a bit even after post 9/11 and 2009.

Yeah, but the bond portfolio was beating the other two until sometime in 2016! Over 16 years!

 

[Sunset]

Now I know what to do if we can convince the Fed to lower interest rates to -10%

 

[Markola]

Yeah, but the bond portfolio was beating the other two until sometime in 2016! Over 16 years!

Yes. And it took until 2017/2018 for pure stocks to catch up with and finally start to exceed pure bonds. Think about that for a moment. For nearly the entirety of last two decades, one would have better off in 100% bonds than 100% stocks.

Accepted wisdom is to pile into stocks during times like these “when there is blood in the streets” and then enjoy a certain rocket ship ride to the moon. It’s not been true for the last two recessions. It took several YEARS from the last two bottoms for an all stock portfolio to outperform a simple bond or blended portfolio, slowly tortoising along untouched.

Check this one below out. 2000 was a negative year for stocks but 2002 was that bear market’s bottom. Had you somehow had the guts and foresight to wait through two bloody down years then finally gamble on 100% stocks in 2003, it would have then taken you 3 more years til 2006 just to reach parity with the 50/50 portfolio, only to be walloped again right away in 2008 by the next recession. Then you’d have had 8 more years till 2016 of underwater 100% stock drama to get back to parity and for your stock “rocket ship” to finally achieve clear liftoff compared to the blended portfolio, just in time to get crushed again, ie right now. Call me a tortoise.

 

[USGrant1962]

Now I know what to do if we can convince the Fed to lower interest rates to -10%

+1

EDIT - oh and +1 for 40/60, 50/50, and 60/40 too, even when rates don't go in essentially a straight line from 6.66% to 0.63% (ten-year).

 

[Freedom56]

Investors are enchanted by stocks’ unique ability to grow, grow, grow. Turns out, it’s equally important to not fall, fall, fall.

Portfolio 1 VBMFX = Vanguard Total Bond Index Fund
Portfolio 2 VFINX = Vanguard S&P 500

View attachment 34437

Maybe the safest and best strategy for a long term, buy and hold investor is to set the allocation at 50/50 and leave it alone?

You should compare your vanguard S&P 500 fund with individual bonds like this one that was issued in 2009 at 7.2% coupon.

Bonds Detail

I owned this one from issuance sold it mid February 2020. During the period from 2000 to 2009 the coupon payments were even higher (for similar bonds from this issuer) but assume the same coupon rate and run the numbers. Par value was $100 at issuance. It is currently at $163. The results will shock you and illustrate the point I have made many times, that bond funds are not a good idea and neither are equity funds.

 

[jimbee]

Investors are enchanted by stocks’ unique ability to grow, grow, grow. Turns out, it’s equally important to not fall, fall, fall.

Portfolio 1 VBMFX = Vanguard Total Bond Index Fund
Portfolio 2 VFINX = Vanguard S&P 500

Maybe the safest and best strategy for a long term, buy and hold investor is to set the allocation at 50/50 and leave it alone?

Hey, have you been peeking at my portfolio?

 

[Aggie1999]

Do something more realistic, like start in 2000 with $10k and then contribute $10k per year (~$833 per month). Doing that and 100% equities are still up ~$150k over 100% bonds as of March 31. The 100% equities portfolio beats the 50/50 portfolio by ~$60k.

 

[compounder]

Very cool charts and thread!

I figured I'd give that a shot in the visualizer as well with a total stock market index, VTSMX and the result looks very similar to me fwiw. Very interesting.

 

[WyomingLife]

This is a fascinating thread, thank you all.

Quick question (and I am certain it is ignorant, for which I apologize): how do these analyses and comparable ones treat returns from asset classes (dividends, interest)? Do they assume such returns are reinvested? Or are these analyses only looking at the values of the underlying asset classes?

Given a low interest rate environment — or good grief, maybe even a future negative one — and knowing nothing else, my hypothesis might be that a basket of dividend paying stocks might generate more returns than a basket of interest paying bonds from the perspective of an investor who never sold the underlying assets, be they stocks or bonds.

Again, thank you all.

 

[Closet_Gamer]

Super interesting charts charts and a whale of a good argument for balance portfolios and a long term view.

Of course, we've been in a 20-30 year bull market for bonds as rates have gotten crushed. I smile fondly remembering a 6.75% five year CD I bought in the 90s. Ah, the good old days.

I think that chart is a cautionary tale that portends no good. Absent seriously irrational negative rates that bond movie is coming to an end. Either interests go up and the principle gets squashed or interest rate stay the same and the entire asset class has no real return.

Of course, if rates go up, that will likely trigger a real stock market rationalisation as well.

Bubble go pop?

 

[Dtail]

Super interesting charts charts and a whale of a good argument for balance portfolios and a long term view.

Of course, we've been in a 20-30 year bull market for bonds as rates have gotten crushed. I smile fondly remembering a 6.75% five year CD I bought in the 90s. Ah, the good old days.

I think that chart is a cautionary tale that portends no good. Absent seriously irrational negative rates that bond movie is coming to an end. Either interests go up and the principle gets squashed or interest rate stay the same and the entire asset class has no real return.

Of course, if rates go up, that will likely trigger a real stock market rationalisation as well.

Bubble go pop?

Bolded by me - Nothing wrong with this type of inflation. Stay out of the bond funds as interest rates rise, then lock in a higher rate. If one's personal inflation rate is lower than the official CPI, one should be a winner in this situation.
My insurance rates increases are not based on the CPI.

 

[mrfeh]

Somewhat interesting, but looking at any 20 year period in isolation is not very informative.

 

[target2019]

Tacking on a good portion of the 90s makes this more like our investing lifetime.
Stocks beat the 50/50 portfolio here.

 

[Markola]

Warning friends: Once you start hypothesizing on the free Portfolio Visualizer site, you won’t sleep for 3 days. It’s that fascinating. I played with it on vacation and optimized my way to ultra high wealth, all in the rear view mirror of past results, of course.

My assumptions for the above were annual rebalancing and reinvestment of dividends. I don’t invest in any individual securities, personally, and don’t know how or care to choose and model those. I’m only in Vanguard index funds and I’m staying the course with my allocation. There are many paths to Rome but call me a true believer Boglehead.

I share the concern about domestic bond funds’ future, though I believe they remain one safe haven for investors’ flights to safety in times of stock market stress. To wit, my total domestic bond index is already up 2.62% in 2020. But there’s probably not much room left to run long term, which is why the smarter-than-me people at Vanguard have been diversifying their Target Date and Life Strategy funds-of-index-funds into international bonds and stocks over the last decade.

FWIW, I am 54 and DW is semi-retired so our own 50/50 portfolio has evolved slowly over the last several years to reflect a Vanguard 2020 Target Date Fund consisting of index funds for:

29% domestic bonds
8% TIPS
13% international bonds
30% domestic stocks
20% international stocks

We’re down 12.2% this year so far and I’m most interested to see where we end up on 12/31/20, not that I’ll make any changes then. YMMV.

 

[target2019]

As during the past 30 years, I'll log in at end of each month and record the numbers. FWIW, I look at Portfolio VIsualizer and simply end with the thought, "But where's the picture of our story?"

It's a great site to make a point, but then someone makes a different point, and you might spill your coffee!

 

[audreyh1]

Do something more realistic, like start in 2000 with $10k and then contribute $10k per year (~$833 per month). Doing that and 100% equities are still up ~$150k over 100% bonds as of March 31. The 100% equities portfolio beats the 50/50 portfolio by ~$60k.

Not contributing is also realistic. If someone is retired they are generally no longer contributing to their investment portfolio.

 

[Aggie1999]

Not contributing is also realistic. If someone is retired they are generally no longer contributing to their investment portfolio.

Sure, but for that to mean anything the advice would have to be move everything from stocks to bonds at retirement. Pretty poor advice.


These type of threads are interesting, but are nothing more than cherry picking a date in the past to make numbers look one way or the other. I could start the same thread with the dates being 2003-2020. Then a 100% bond portfolio doesn't look to good.

 

[razztazz]

Sure, but for that to mean anything the advice would have to be move everything from stocks to bonds at retirement. Pretty poor advice.


These type of threads are interesting, but are nothing more than cherry picking a date in the past to make numbers look one way or the other. I could start the same thread with the dates being 2003-2020. Then a 100% bond portfolio doesn't look to good.

Which is the absolute fallacy of nearly all advice on the subject. The only thing that matters is **Save Your Money**. The rest is dessert, window dressing, just something to pass the time away....

 

[ER Eddie]

Interesting, thanks for sharing. I've always thought of bonds as safe, boring, and not terribly useful except in buffering you from massive collapses in the stock market. I'm surprised to see how effective they are.