'60/40' portfolios are facing worst returns in 100 years: Bank of America

[Big_Hitter]

" Investors with classic "60/40" portfolios are facing the worst returns this year for a century, Bank of America (BofA) Global Research said in a note on Friday (Oct 14), noting that bond markets continue to see huge outflows."

https://www.todayonline.com/world/6...-worst-returns-100-years-bank-america-2020116

this has to be especially brutal for qualified pension trusts

 

[VanWinkle]

I would think that any AA from 10%stock/90%bond to 70/30 is having one of it's worst years ever due to bonds dragging down returns along with stocks down 25-30%. 60/40 just happens to be one in the series and the one pundits like to call extinct.

 

[audreyh1]

Good point! The allocation doesn’t matter this year unless you were mostly cash at the start.

“Cash is Trash” until “Cash is King”!

 

[OldShooter]

Ho, hum. Nothing to see here folks. Back to sleep with our long-range strategy.

 

[FLSUnFIRE]

Good point! The allocation doesn’t matter this year unless you were mostly cash at the start.

“Cash is Trash” until “Cash is King”!

-8% return on cash! Good certainly is relative (or course, market losses and inflation is even worse)!



Still, I'm not going back to work... no, no, NO! (unless it's getting paid to have fun) I actually invested $2 in Mega Millions this week... seems to be a much better option than the market! (first time gambling this year)

 

[audreyh1]

-8% return on cash! Good certainly is relative (or course, market losses and inflation is even worse)!

Still, I'm not going back to work... no, no, NO! (unless it's getting paid to have fun) I actually invested $2 in Mega Millions this week... seems to be a much better option than the market! (first time gambling this year)

If you want to subtract 8% from cash due to inflation, you have to subtract the same from bond and stock values as well, increasing their losses much more.

In this environment, cash has still been king from the start of this year.

 

[daylatedollarshort]

If you want to subtract 8% from cash due to inflation, you have to subtract the same from bond and stock values as well, increasing their losses much more.

In this environment, cash has still been king from the start of this year.

TIPS and I bonds are returning CPI inflation, or CPI inflation plus up to 4% more, depending on the real yields.

 

[NW-Bound]

The high inflation is a real killer. Your investments have to earn that much just to keep even.

And then, after paying taxes on the gains that are "phony" (because they only match inflation) you still lose.

No different than rowing upstream, or running on a threadmill set on high.

 

[FLSUnFIRE]

If you want to subtract 8% from cash due to inflation, you have to subtract the same from bond and stock values as well, increasing their losses much more.

In this environment, cash has still been king from the start of this year.

I agree, that's why I said, "(of course, market losses and inflation is even worse)!"



Not fun market for my first calendar year unemployed (I mean FIREd). Inflation concerns me more than the market performance. I expect the market to eventually turn around but inflation not so much.

 

[foxfirev5]

Ho, hum. Nothing to see here folks. Back to sleep with our long-range strategy.

Absolutely. If the recent developments have turned your plan upside down it wasn't much of a plan.

 

[Freedom56]

It's not doom and gloom for everyone. Not everyone bought into this 60/40 passive fund investing concept. Those of us who have zero exposure to equities, bond funds, and have zero debt are doing quite well this year and positioning themselves for a nice income flow for the years ahead. Ask income investors who buy CDs, treasuries, or individual bonds if this year has been bad for them? Today, with every million invested, you can generate $45K per year with treasuries and CDs, or $55K per year with agency notes all with zero risk to capital. A year ago, it would have been in the range of 1.2K to $10K depending on the duration. For each million you can earn $60K per year with high grade corporate notes or $72K per year with medium investment grade notes with a return of capital. Zero and negative interest rates were an anomaly. It created a massive super bubble in equities and debt levels. That trend has to reverse and will take decades to do so. We may just return to a time where savers can feel secure again.

 

[OldShooter]

It's not doom and gloom for everyone. Not everyone bought into this 60/40 passive fund investing concept. Those of us who have zero exposure to equities, bond funds, and have zero debt are doing quite well this year and positioning themselves for a nice income flow for the years ahead ...

All true, as long as "nice" is defined as an income flow that historically has been substantially lower than the flow from a less conservative portfolio. Sorry I have not updated this chart recently, but the trend (with its inevitable wiggles) prevails:

​

Note the y-axis is semi log. Over the period, equities have outperfomed around 50x. That's nice.

 

[Freedom56]

All true, as long as "nice" is defined as an income flow that historically has been substantially lower than the flow from a less conservative portfolio. Sorry I have not updated this chart recently, but the trend (with its inevitable wiggles) prevails:

​

Note the y-axis is semi log. Over the period, equities have outperfomed around 50x. That's nice.

Most people don't live past 100 years old so silly charts going back to 1926 means nothing. Why don't you look at the last 22 years? Well managed fixed income portfolios of high yield and investment grade bonds have outperformed equities since the year 2000. This is a fact of life. Comparing loser index bond funds some that are about to wipe out all returns since inception, with equity funds is hardly a comparison. Bond funds are not bonds. Do you still not understand that? Passive funds are a bubble. Don't take my word for it, listen to Michael Burry:

"Difference between now and 2000 is the passive investing bubble that inflated steadily over the last decade. All theaters are overcrowded and the only way anyone can get out is by trampling each other. And still the door is only so big,"

https://nypost.com/2022/10/03/michael-burry-flags-passive-investing-bubble-as-market-risk/

This super-bubble will take at least 3 years to bottom just like the one in 2000. Rate hikes popped the the dot com bubble and rate hikes have only started to pop this one. I have the same game plan as I did in 2000 -2003, just keep laddering short duration fixed income at higher and higher yields with 100% return of capital. Only this time I will have passive bond funds trampling over each other dumping bonds at significant losses and much higher yields come this tax loss selling season.

 

[OldShooter]

... Passive funds are a bubble.

Kind of a silly statement considering that passive funds are the market. So it's the equivalent of saying the market is a bubble. Maybe. We'll see. But whatever happens won't have much to do with passive or non-passive funds.

The people who sell stock-picking to the naïve have been making more or less this same argument for years. Boring.

... Bond funds are not bonds. Do you still not understand that?

I said nothing about bond funds. The chart says nothing about bond funds. We don't buy bond funds (except ultra-short for liquidity) for what we thought were obvious reasons.

... This super-bubble will take at least 3 years to bottom just like the one in 2000.

Your confidence in your predictions always amuses me. Man plans. God laughs.

 

[SnowBound]

Predictions are great. If enough people predict enough different outcomes, someone is going to be correct. Could this be why there is always one brokerage house (or fund) that does great over the past year (but never five years in a row)?

Also, I'm predicting 100 inches of snowfall this winter. I know I will be right, but I have to wait until spring to say wait town I'm predicting for.

 

[NW-Bound]

Also, I'm predicting 100 inches of snowfall this winter. I know I will be right, but I have to wait until spring to say wait town I'm predicting for.

Valdez, Alaska, routinely has 300 inches (25 ft, 7.6 m) of snow.

Nearby Thompson Pass has 600-900 in. (50-75 ft, 15-30 m) of snow each year.

 

[big-papa]

" Investors with classic "60/40" portfolios are facing the worst returns this year for a century, Bank of America (BofA) Global Research said in a note on Friday (Oct 14), noting that bond markets continue to see huge outflows."

https://www.todayonline.com/world/6...-worst-returns-100-years-bank-america-2020116

this has to be especially brutal for qualified pension trusts

Unless you buy the "40" part for the income it produces and not returns it may generate as an asset in the short term. The income from my long term TIPs looks pretty nice as a soon-to-be-retiree...

 

[Letj]

Most people don't live past 100 years old so silly charts going back to 1926 means nothing. Why don't you look at the last 22 years? Well managed fixed income portfolios of high yield and investment grade bonds have outperformed equities since the year 2000. This is a fact of life. Comparing loser index bond funds some that are about to wipe out all returns since inception, with equity funds is hardly a comparison. Bond funds are not bonds. Do you still not understand that? Passive funds are a bubble. Don't take my word for it, listen to Michael Burry:

"Difference between now and 2000 is the passive investing bubble that inflated steadily over the last decade. All theaters are overcrowded and the only way anyone can get out is by trampling each other. And still the door is only so big,"

https://nypost.com/2022/10/03/michael-burry-flags-passive-investing-bubble-as-market-risk/

This super-bubble will take at least 3 years to bottom just like the one in 2000. Rate hikes popped the the dot com bubble and rate hikes have only started to pop this one. I have the same game plan as I did in 2000 -2003, just keep laddering short duration fixed income at higher and higher yields with 100% return of capital. Only this time I will have passive bond funds trampling over each other dumping bonds at significant losses and much higher yields come this tax loss selling season.

Thanks again for all the good information. I am religiously following this thread and waiting for the big dump so I can scoop up some. It’s not really passive investment (the preferred method of many like me) because you have to constantly analyze and add new bonds as others expire.

 

[COcheesehead]

Overall yield with our asset allocation is north of 4% - much of that tax free - thanks to our two fairly substantial bond ladders. We’ll see no loss of capital because we hold individual bonds. We do not need to touch equities for likely 15 years. Our withdrawal rate on assets as of yesterday’s close is 2.15%. If this time is one of the worst ever, I feel pretty good about where we are at.

 

[daylatedollarshort]

Overall yield with our asset allocation is north of 4% - much of that tax free - thanks to our two fairly substantial bond ladders. We’ll see no loss of capital because we hold individual bonds. We do not need to touch equities for likely 15 years. Our withdrawal rate on assets as of yesterday’s close is 2.15%. If this time is one of the worst ever, I feel pretty good about where we are at.

I posted an excerpt in another thread recently from The Bond Book by Annette Thau. She said, "For reasons that escape me, individual bonds and bond funds are treated in the financial press as interchangeable instruments. But they are not." Individual bond holders are having a pretty good year with rising yields and $0 loss of capital. But you wouldn't know any of that from the financial article headlines.

 

[Lsbcal]

I posted an excerpt in another thread recently from The Bond Book by Annette Thau. She said, "For reasons that escape me, individual bonds and bond funds are treated in the financial press as interchangeable instruments. But they are not." Individual bond holders hare having a pretty good year with rising yields and $0 loss of capital. But you wouldn't know any of that from the financial article headlines.

There is a detailed Bogleheads review of individual bonds vs bond funds here:
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

I personally can own individual inflation protected bonds and (though not at present) a switch strategy involving short term investment grade and intermediate Treasuries. So am middle of the road. Hopefully not road kill.

 

[Freedom56]

I posted an excerpt in another thread recently from The Bond Book by Annette Thau. She said, "For reasons that escape me, individual bonds and bond funds are treated in the financial press as interchangeable instruments. But they are not." Individual bond holders hare having a pretty good year with rising yields and $0 loss of capital. But you wouldn't know any of that from the financial article headlines.

It's just not the financial press but the vast majority of financial advisors don't understand the difference between individual bonds and bond funds. This includes the three clowns assigned to our accounts at TDA, Schwab, and Fidelity. The don't even understand the basic concept that bonds and bond funds and brokered CD prices fluctuate as rates rise and fall but individual bonds/notes and CDs mature at par or higher if called early. Bond funds play by silly self-inflicted rules that cause them to sell securities at a loss as rates rise. Bond funds are financial sink holes when rates rise. At the beginning of this year I stated that 2022 was looking to be a repeat of 2013 and I warned about funds holding too much low coupon debt and they would be unable to increase distributions as rates rise and that they would be in a "buy high/sell low more". We are now at a point where money market funds yield more than the vast majority of bond funds. But 2013 was a "taper tantrum" that caused bond funds to tank. This year is a combination rate hike and taper tantrum. I have been de-risking my portfolio by investing coupon payments, maturing and called notes, with high grade corporate notes at yields I haven't seen since 2007. You don't even have to search hard for yields. There are so many great choices from treasuries, CDs, GSEs, and corporate notes. Corporate notes from large banks are being issued at 6% now versus 0.8% last year for the same duration. The best thing is that a so many Fortune 500 corporations re-financed over the past two years at historically low rates at the expense of bond fund holders that their balance sheets are safer than ever for those who buy individual corporate bonds. This is the "golden period" for fixed income investing.

 

[Freedom56]

There is a detailed Bogleheads review of individual bonds vs bond funds here:
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

I personally can own individual inflation protected bonds and (though not at present) a switch strategy involving short term investment grade and intermediate Treasuries. So am middle of the road. Hopefully not road kill.

Sorry, but those Bogleheads who continue to justify owning bond funds are about to trample over each other as they exit a narrow door this tax loss selling season. Most of them don't even understand basic arithmetic.

 

[NW-Bound]

Individual bonds may not appear to lose values, but that is in nominal terms.

Suppose you had $100K worth of bond at par in 1965, maturing in 1980. By the time you got back your $100K in 1980, it was worth $40K (1/2.5 of original purchasing power).

That's the loss caused by the cumulative inflation of 150% in 15 years.

I am not a bond fund buyer, nor individual bonds. I just wonder if one is the case of you losing money now, and the other is you lose money later.

 

[Lsbcal]

Sorry, but those Bogleheads who continue to justify owning bond funds are about to trample over each other as they exit a narrow door this tax loss selling season. Most of them don't even understand basic arithmetic.

Did you look over the material at the site I linked to? Actually I did not read it myself but it looked pretty thorough.