Bond funds vs. stock funds

[summer2007]

I'm 34 and just by reading through a lot of the posts on here I think I know nothing compared to most of you on here.

But after looking through some past performances of stock and bond funds I'm wondering if bond funds would return close to the same as stocks going forward.

It seems thing have been so volatile and there is even talk of a recession now.

I remember the 90's where the stock market went up like a rocket and if you include the 90's in long term averages. I think it might be a misleading because I don't know if we will see that kind of rapid gain again.

Like right now the dow would have to go to what about 40,000 or 50,000 in the next decade to equal the gain of the 90's?

If you throw the 90's out it changes things a lot.

Anyway I just wanted to see what people thought of being mostly in bond funds at a younger age vs. being mostly into stock funds?

Thanks

Jim

 

[REWahoo]

Anyway I just wanted to see what people thought of being mostly in bond funds at a younger age vs. being mostly into stock funds?

From my perspective (61), I don't think it's such a hot idea.

If (that's a much bigger word than the two measly letters Mr. Webster allocated it) the future is anything like the past, stocks will significantly outperform bonds in the long run. At your age you need to focus on that last phrase, select an allocation you can live with, say 80/20 or 70/30 at a minimum, invest early & often, and get on with your life.

 

[audreyh1]

It's really hard to envision bond funds performing on par with stock funds in the long run. The main obstacle is that interest rates are currently VERY low. It's hard to see them go much lower in the long run, so it's hard to envision much capital gain for bonds. And with the current low interest rates you aren't getting paid much to hold bonds - 4%.

It seems like stocks in the long run should be able to easily beat 4%.

Most of us who hold bonds do so for portfolio diversification purposes (to lower volatility and provide opportunities to rebalance), not because we think they will outperform or meet stock fund performance over the long run.

Audrey

 

[mathjak107]

remember the 5-1/4% passbook savings account interest and christmas club interest we used to get that was sooooo low it was a joke.

well here we are almost 40 years later and that looks like a great deal today

 

[mickeyd]

Hey Jim,

I'm wondering if bond funds would return close to the same as stocks going forward.

It seems thing have been so volatile and there is even talk of a recession now.

It is sometimes difficult to bear up during short term dips in the economy. It is always impossible to accurately predict the future.

My best advice is to avoid the noise and all of the financial porn that is being written. Think long term and invest accordingly. Most long term investors like a portion of their portfolio (usually at least 20%) in bonds or bond funds, as REWahoo indicated. Bonds tend to make that long journey a smoother ride, though they may reduce LT returns a bit. It's all about understanding how investment risk works and what your time horizon is.

 

[danm]

They certainly did last year. The Lehman bond aggregate returned 7%, compared to less than 4% for the S&P (which is now around 0%, while bonds marched on) Some steller bond funds, such as the PIMCO total returns which I own, returned 10%. Risk adjusted this is a wonderful return.

Yes it's impossible to accurately predict the future, but that is an extreme statement. How about a reasonable prediction of the future? Everybody does this - those who mostly buy stocks over bonds are making the prediction that in aggregate, stocks will outperform. Except for when they don't such as last year, or during many other periods in our history.

My point is that I think it's a fallacy to believe that you're not making a prediction if you have a diverse set of investments which are geared towards stocks. It's equally valid to make a general prediction of a protracted period of economic stagnation, which has happened many times in the past, and invest in a diversity of bonds.

I see few drivers for growth myself, instead I see an economy which is increasingly resistant to debt stimulus, a surplus of labor and goods, overburdened and aging consumers, and other factors which should contribute to an environment favorable for bonds. Additionally though I think our economy will remain healthy and has great long term prospects, but I see bonds are a good buying opportunity compared to stocks going forward.

 

[brewer12345]

Actually, investment grade corporates and mortgage-backed securities are a much better deal than they have been in years, so I find myself enthusiastically buying individual issues at the ripe old age of 34.

Having said that, you really do not want to be all bonds or all stocks. What you want is a well diversified portfolio that catches some of the performance of every asset class over the long haul. Domestic stocks, overseas stocks, domestic bonds, foreign currency bonds, real estate, commodities, inflation linked bonds, etc. should all ideally be in your portfolio when you have along term time horizon. None of us can confidently predict what the next year will bring for different asset classes. But history is a pretty good guide if you have a 10+ year investment horizon, and history strongly suggests that a portfolio dominaed by bonds is not a great idea.

 

[mathjak107]

every asset class eventually has its day in the sun but time and time again thru over 100 years of history ,inflation adjusted ,equities have blown away every asset class. in a pure negative return after inflation return i believe bonds have had 5 or 6x the number of loosing years.

i forgot which thread but someone actually took the time here to post like 60 years of returns for inflation adjusted equities and bonds, it was mind blowing to see almost how predictable equities gains were long term. bonds were considerly more of a riskier investment

 

[danm]

One mistake most of those studies make is that they don't look at capital appreciation of bonds, but simple buy and hold coupon. If you bought 30 year treasury zeros starting in 1982, sold them at the end of the year and re-rolled them over, you would have beat the S&P by 4.5 X (returns would have been 4.5 times what you would have gotten as a buy and hold S&P) - for example.

Bonds are a usually misunderstood asset class, in my small experience.

 

[mathjak107]

the study was total return not just yield, even the eighties werent great for bonds as inflation ate those nice lofty yields. bonds in the 80's seemed to be an abnormality at those rates as the 60 year average is 5-1/4%.

you also cant have both the capital appreciation and coupon rate for very very long as to get the coupon rate you cant sell the bond and have to hold it. to get the capital appreciation you have to sell the bond, get the capital appreciation but not the coupon rate. people who hold to maturity see no capital appreciation only coupon rate

 

[ats5g]

One mistake most of those studies make is that they don't look at capital appreciation of bonds, but simple buy and hold coupon. If you bought 30 year treasury zeros starting in 1982, sold them at the end of the year and re-rolled them over, you would have beat the S&P by 4.5 X (returns would have been 4.5 times what you would have gotten as a buy and hold S&P) - for example.

Bonds are a usually misunderstood asset class, in my small experience.

Actually, all those studies use the total return bond data from Ibbotson Associates, which includes capital gains/losses + coupon reinvestment, just like a bond fund. For example, Ibbotson's LT Treasury return data is very similar to the returns for Vanguard's LT Treasury fund, and Ibbotson's LT corp return data is very similar to the returns for what used to be Vanguard's LT Corp fund.

- Alec

 

[mathjak107]

what your saying about your bonds going up 4x may be true if you caught that year or couple of years lucky, but for most of us we dont put all our money in a bond and let it ride, like a bond fund we have different rates, different maturities and different economic times they were bought.


our own bond portfolios began to actually mimic a bond fund over time with bonds always maturing and new bonds replacing them. its this mix thats tracked over time and each year total return is compared to the inflation rate to see if you made or lost money

 

[mathjak107]

safe harbour worked this up on a previous post and we thank him;;;;;;

Ok, I couldn't wait here are the numbers. Now 10 year compounded return minus 10 year inflation. Starting with the period 1928-1938 and finishing with 1996-2006. Indeed there are quite a few negatives when you adjust for inflation.


Not Inflation Adjusted Inflation Adjusted
________________________ ===================
T-Bill 5-Yr T Lng Bnd T-Bill 5-Yr T Lng Bnd
10.69% 49.38% 48.83% 29.18% 67.87% 67.32%
5.72% 49.66% 51.85% 22.68% 66.62% 68.81%
3.24% 46.57% 53.74% 21.37% 64.70% 71.86%
2.12% 54.52% 72.24% 14.69% 67.10% 84.82%
1.10% 42.74% 48.80% 2.50% 44.13% 50.19%
1.10% 42.88% 53.71% -20.60% 21.17% 32.00%
1.31% 34.75% 42.67% -26.72% 6.72% 14.64%
1.51% 28.20% 39.68% -26.43% 0.26% 11.74%
1.61% 27.20% 43.84% -27.38% -1.78% 14.85%
1.71% 26.45% 43.41% -27.37% -2.62% 14.33%
2.22% 20.14% 32.40% -49.19% -31.27% -19.01%
3.04% 17.15% 29.15% -66.25% -52.13% -40.13%
4.17% 16.36% 29.52% -68.49% -56.30% -43.15%
5.42% 16.59% 28.49% -61.25% -50.08% -38.18%
6.68% 14.87% 19.65% -55.10% -46.91% -42.13%
8.06% 13.53% 18.59% -48.74% -43.27% -38.21%
9.68% 15.09% 19.52% -43.19% -37.78% -33.36%
10.34% 15.66% 15.74% -40.79% -35.47% -35.38%
11.65% 13.71% 14.35% -35.05% -32.99% -32.35%
13.88% 12.24% 10.83% -10.77% -12.41% -13.82%
16.59% 18.74% 15.22% 0.13% 2.29% -1.23%
17.05% 14.56% 1.68% -2.12% -4.60% -17.48%
19.13% 13.31% -0.75% -4.27% -10.09% -24.16%
20.54% 26.18% 17.53% 5.19% 10.83% 2.17%
21.01% 26.55% 17.29% 8.56% 14.10% 4.84%
22.08% 29.50% 21.03% 9.30% 16.71% 8.25%
24.75% 28.11% 14.26% 11.73% 15.10% 1.25%
27.08% 34.17% 19.81% 11.35% 18.44% 4.08%
28.81% 36.06% 27.81% 12.40% 19.64% 11.39%
30.81% 32.15% 23.29% 15.59% 16.93% 8.07%
34.29% 35.22% 19.22% 19.26% 20.19% 4.19%
37.16% 41.88% 21.66% 19.57% 24.29% 4.07%
42.37% 26.01% 1.46% 20.87% 4.51% -20.05%
48.50% 44.56% 12.61% 21.66% 17.72% -14.24%
50.96% 48.81% 19.24% 18.29% 16.14% -13.42%
51.99% 54.08% 24.54% 16.79% 18.88% -10.65%
56.98% 54.97% 19.01% 19.12% 17.11% -18.86%
63.17% 62.18% 23.38% 13.81% 12.82% -25.98%
64.73% 66.98% 29.93% 0.89% 3.15% -33.91%
66.15% 86.66% 67.13% -2.84% 17.66% -1.87%
66.00% 81.12% 66.46% -5.56% 9.57% -5.10%
66.93% 88.78% 73.30% -8.63% 13.22% -2.26%
73.04% 68.11% 52.74% -7.64% -12.58% -27.95%
84.48% 60.69% 29.53% -11.00% -34.79% -65.95%
103.85% 67.10% 24.87% -7.83% -44.58% -86.81%
110.72% 106.24% 77.27% -10.64% -15.12% -44.09%
112.28% 109.56% 70.99% 2.41% -0.31% -38.88%
120.30% 121.61% 80.85% 24.72% 26.03% -14.73%
125.75% 136.14% 102.84% 36.01% 46.39% 13.09%
128.12% 168.04% 154.32% 40.77% 80.69% 66.97%
124.50% 166.49% 150.46% 46.58% 88.57% 72.54%
116.36% 171.61% 178.09% 46.96% 102.21% 108.69%
110.73% 196.18% 242.11% 55.07% 140.52% 186.45%
98.05% 196.99% 256.54% 51.61% 150.55% 210.11%
89.27% 165.24% 202.96% 46.53% 122.51% 160.22%
80.05% 164.75% 229.14% 38.84% 123.54% 187.93%
68.73% 158.25% 236.83% 28.79% 118.31% 196.89%
62.78% 103.72% 137.07% 24.20% 65.14% 98.49%
61.86% 105.49% 150.78% 24.73% 68.36% 113.64%
61.40% 103.89% 155.42% 22.55% 65.05% 116.57%
59.73% 108.31% 169.85% 22.22% 70.80% 132.34%
54.57% 102.61% 158.43% 21.13% 69.17% 124.98%
50.13% 81.37% 121.44% 21.17% 52.41% 92.47%
50.56% 77.13% 125.52% 25.22% 51.79% 100.19%
50.51% 77.71% 115.03% 24.52% 51.71% 89.03%
48.66% 82.42% 112.25% 24.46% 58.23% 88.05%
44.55% 96.78% 136.37% 20.27% 72.50% 112.09%
38.80% 75.25% 92.26% 15.58% 52.03% 69.04%
36.17% 75.63% 106.83% 12.66% 52.12% 83.31%
35.59% 67.11% 81.56% 10.95% 42.47% 56.92%
__________________
Safe Harbour

 

[danm]

what your saying about your bonds going up 4x may be true if you caught that year or couple of years lucky, but for most of us we dont put all our money in a bond and let it ride, like a bond fund we have different rates, different maturities and different economic times they were bought.

That was from 1982-present, long bond zeros vs S&P. Quite a long bull market - unfortunately one I didn't participate in.

 

[jIMOh]

Bonds have less risk than equities. Because of this, one would expect bonds to have lower returns over long periods of time.

Bonds provide a few key aspects to a portfolio:

1) INCOME. Bonds pay interest each month, quarter and/or year. To many retirees, this is a great way to generate income. Principal is returned as well. There is risk to both principal and interest rates.

2) Stable value. Bonds promise the income above and return of principal. There is no guarantee the promises will be met (as interests rates go, the principal value moves the other direction). These forces create a relatively positive return which provides a constant value to a portion of portfolio.

3) Hedge on US dollar. If a person invests in foreign bonds and foreign currencies, as the US dollar decreases in purchasing power, the value of the foreign bonds will )appear?) to increase.

 

[summer2007]

Thanks everyone.

This has given me a lot to think about

Danm

Is there any info on the long bond zeros that shows their returns...I thought that was pretty interesting.

Jim