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

[daylatedollarshort]

Real yield of 1.33-3% of TIPS sounds really good right now.

On the other hand, Portfolio Visualizer just told me that from Jan 2000 (near the peak of the tech bubble) to now, the S&P returns 9.32%/year after inflation. Again, that's counting the YTD terrible drop.

Over the same 22-year period, Vanguard Total Bond VBMFX returns 4.18%/year after inflation. That's also after YTD drop.

The difference of 4.18% of VBMFX to TIPS yield, when compounded over 22 years is big. Of course, we don't know what the future will bring.

And if one knew to jump in/out of different assets at the right time, he would do fabulously well. I was not able to do this.

People don't hold TIPS to make a killing in the stock market during retirement. TIPS are good for conservative investors who want guaranteed income as well as inflation protection. At 1.33% real yield they provide a 4% safe withdrawal rate over 30 years, with zero stock market angst or worries about a 1.99% future safe withdrawal rate.

Since the 80s, interest rates were declining worldwide, which helped bond fund returns because the bonds they held were always worth more than current yielding bonds. But now that trend is reversing, with inflation and interest rates climbing worldwide. Bond prices are dropping, except for bonds with a maturity date that can be redeemed at par.

VBMFX has a SEC yield of 3.86% (less than 1 year Treasuries, which have no market risk), a YTD return of -15.84%, and a five year return of -0.71%. https://www.schwab.com/research/mutual-funds/quotes/performance/vbmfx

It is not always easy to predict in advance when rates will change, except in circumstances like we've had this year when the Fed says they intend to raise rates 6 - 7 times. When rates go up that steeply, bond prices are going to go down.

 

[NW-Bound]

I recently explained to my wife about our cash flow. The stock dividends, interests from fixed income, and the option premium add up to more than 4x our expenses. And I have not counted SS.

If stock dividends do not drop drastically, or inflation goes up sky high, we have no problems having positive cash flow. The principal value of the portfolio may go down, but if I don't need to sell anything to live on, then it's nothing more than a bad feeling.

And so far, it's nowhere as bad as what I have been through in the past economic crises.

Won't say the trite "Yawn" like some preposterous posters do (if they don't care, then don't read these threads). It's interesting to see where this market goes. Worried, I am not.

 

[NW-Bound]

Then why are you even posting?

I guess I should know better than to enter into the fray of individual bonds vs bond funds. I don't have either anyway.

Here's my earlier post on this thread:

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 (bond fund), and the other is you lose money later (individual bond).

Freedom replied that:

You receive semi-annual coupon payments that you can re-invest and compound your returns. For the majority of Fortune 500 companies, their bonds have outperformed their stocks over the past 20 years. Some examples: Ford, GE, Citigroup, Bank of America, and so on...

However, I like to see a spreadsheet showing how reinvesting the coupon will overcome the huge loss due to inflation like 1965-1980. I always like to learn something new.

 

[audreyh1]

This thread isn’t even about about bonds versus bond funds. It’s about the 60/40 allocation doing so poorly. And most other allocations it turns out.

 

[NW-Bound]

People don't hold TIPS to make a killing in the stock market during retirement. TIPS are good for conservative investors who want guaranteed income as well as inflation protection. At 1.33% real yield they provide a 4% safe withdrawal rate over 30 years, with zero stock market angst or worries about a 1.99% future safe withdrawal rate.

Since the 80s, interest rates were declining worldwide, which helped bond fund returns because the bonds they held were always worth more than current yielding bonds. But now that trend is reversing, with inflation and interest rates climbing worldwide. Bond prices are dropping, except for bonds with a maturity date that can be redeemed at par.

VBMFX has a SEC yield of 3.86% (less than 1 year Treasuries, which have no market risk), a YTD return of -15.84%, and a five year return of -0.71%. https://www.schwab.com/research/mutual-funds/quotes/performance/vbmfx

It is not always easy to predict in advance when rates will change, except in circumstances like we've had this year when the Fed says they intend to raise rates 6 - 7 times. When rates go up that steeply, bond prices are going to go down.

Yes, over the years, I know that you are a conservative investor, and I respect that. I am the type that likes some excitement (but not with new unknown risks like Bitcoin and IPO), so I do what I do.

And I do agree with you about bonds getting hurt bad when interest rate rises. And that's why I never had any.

Well, I should not say I never had any. Not since I started being an active investor. I used to have perhaps 50% in bond fund before 2000 in our 401ks. I don't remember when I got out to cash. Too early I am sure, and missed out on quite a bit of gain. But I told myself I should not go back in and make two wrongs.

Then, I discovered that using the T-Bill fund to back my cash-covered puts generates very nice income. I guess I will not need to time my reentry to bonds now.

 

[NW-Bound]

This thread isn’t even about about bonds versus bond funds. It’s about the 60/40 allocation doing so poorly. And most other allocations it turns out.

Yes, but then people say it's because bonds are not helping stocks this time.

And then, people say it's because it's bond funds, and not individual bonds.

 

[daylatedollarshort]

And I do agree with you about bonds getting hurt bad when interest rate rises. And that's why I never had any.

I still have bonds, but they are all individual ones with maturity dates.

 

[audreyh1]

Yes, but then people say it's because bonds are not helping stocks this time.

And then, people say it's because it's bond funds, and not individual bonds.

Right!

 

[Freedom56]

True with bitcoin. Bond funds and stocks historically gain value with time. Bitcoin has not had any history.

Perhaps this time is different, I have to concede that it's a possibility.

Bond funds do not gain over time. Look at one of the largest one, BND. It's now below the inception price in 2007. Most of them depreciate over time.

 

[NW-Bound]

Bond funds do not gain over time. Look at one of the largest one, BND. It's now below the inception price in 2007. Most of them depreciate over time.

Ah, BND. I am glad I have only 100 shares, bought so that it shows up on my Quicken screen for me to look at every so often. When I clicked on "Group by Category" on Quicken, BND is the sole line showing up in the Bond section. How about that?

Let's look a bit closer at BND. In May 2007, it was at 75 at inception. On last Friday, it was at 70.12.

But it's been paying interests, like any bond. So, let's see what the return is with the interests reinvested.

Portfolio Visualizer says, $10K in 2007 becomes $14,228 now, even after the YTD terrible drop. It was as high as $17K on Dec 31, 2021.

OK, is it still good? Well, let's not forget inflation here. From May 2007 to Sept 2022, the cumulative inflation is 42.73%. This means our $14,228 is worth, well, $9968. We barely break even after inflation with BND after 15 years. That's really crummy.

What about stock? SPY's $10K becomes $32,664 in the same period, again after the YTD terrible drop. After inflation, it's still worth $22,885 after inflation. Hurrah! That's why I love stocks more than bonds. So far so good.

Now, how do we look at individual bonds in the same period? More on this later.

 

[daylatedollarshort]

However, I like to see a spreadsheet showing how reinvesting the coupon will overcome the huge loss due to inflation like 1965-1980. I always like to learn something new.

Inflation per se doesn't hurt bond returns. It is real yield that matters. If inflation was 10% and bonds yields were 15%, bonds would be making 5% real yield. TIPS and I bonds with real yields are doing great right now.

The Fed is raising interest rates now to the point where real yields on nominal bonds should also be positive before too long. Historically, interest rates have to go above the inflation rates for inflation to come down, and The Fed is marching along this path to get to their 2% inflation rate. Unless The Fed changes course, there is a high probability of more pain ahead for stocks and bond funds, as interest rates continue to rise and the higher yields attract more investors to individual bonds.

 

[yakers]

So 60/40 isn't doing well, a lot of assets are not doing well. VG Balanced VBIAX is the 60/40 poster boy, it has doen well over time not so much lately.. What fund would would be a better long term fund without trying to time the market (much)?

 

[OldShooter]

So 60/40 isn't doing well, a lot of assets are not doing well. VG Balanced VBIAX is the 60/40 poster boy, it has doen well over time not so much lately.. What fund would would be a better long term fund without trying to time the market (much)?

Warren Buffet: "Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell." "Lethargy, bordering on sloth should remain the cornerstone of an investment style."

John Bogle: "Don't just do something. Sit there."

You're fine.

 

[NW-Bound]

...
Now, how do we look at individual bonds in the same period? More on this later.

I tried to look at some investment-grade corporate bonds that are about to reach maturity. I wanted to find a bond that was issued about 15 years ago, in the same time frame as BND inception date in order to have a good comparison.

Well, I did not want to spend much time, but of all these bonds that are about to reach maturity, their coupon rates run around 2.5%, and they are all short-term bonds issued just a few years ago.

So, I have not found some individual bonds issued 15 years ago to compare to BND.

 

[retired1]

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

Yes exactly. Enjoy the show !

 

[NW-Bound]

Inflation per se doesn't hurt bond returns. It is real yield that matters. If inflation was 10% and bonds yields were 15%, bonds would be making 5% real yield. TIPS and I bonds with real yields are doing great right now.

The Fed is raising interest rates now to the point where real yields on nominal bonds should also be positive before too long. Historically, interest rates have to go above the inflation rates for inflation to come down, and The Fed is marching along this path to get to their 2% inflation rate. Unless The Fed changes course, there is a high probability of more pain ahead for stocks and bond funds, as interest rates continue to rise and the higher yields attract more investors to individual bonds.

Right now, inflation runs 8.2% YOY. Newly issued bonds have coupon rate of 6% or so. Old bonds have YTM also of around 6% (they trade below par).

The yield is lower than the current inflation rate, because bond traders expect the inflation rate to drop. If inflation stays high for a longer time, the newly issued bonds will look bad. If inflation drops, people who buy bonds now will be dancing with joy. What will it be?

In order to buy bonds with YTM of 6%, where does one get the money? Unless he is still working and has income to invest, he has to sell something to raise cash. Whatever he sells, bonds or stocks, he sells low to buy low. I am not sure how he wins.

 

[copyright1997reloaded]

Right now, inflation runs 8.2% YOY. Newly issued bonds have coupon rate of 6% or so. Old bonds have YTM also of around 6% (they trade below par).

The yield is lower than the current inflation rate, because bond traders expect the inflation rate to drop. If inflation stays high for a longer time, the newly issued bonds will look bad. If inflation drops, people who buy bonds now will be dancing with joy. What will it be?

In order to buy bonds with YTM of 6%, where does one get the money? Unless he is still working and has income to invest, he has to sell something to raise cash. Whatever he sells, bonds or stocks, he sells low to buy low. I am not sure how he wins.

Yep, I keep shaking my head at thread after thread about how great bonds (in any form) are with yields at 4-5% and inflation at 8+%. I am just happy I sold off my long bond funds quite a while ago (a few years) which was in retrospect early...which I usually am in term of peaks.

I do get that 4% is better than 1% (not too long ago), but then again inflation was under 2% not that long ago. So the real return has gotten worse as compared to 2 years ago!

Look, I'm in there with others buying up those short term T-Bills @ 4% vs. keeping it in a crappy savings account. But I'm not fooling myself into thinking this is a "golden age" of any sort - except one where fixed income owners get crushed by inflation and out of control spending.

As you stated, if inflation gets quickly crushed, these 4-5% will look good. However, the history I look at (like the 80's) was one where inflation took quite a few years to settle down, and that was with REAL interest rates in the +4 and higher range!

REAL yields need to be higher for me, myself, and I to go much longer than 12 months or so.

But good luck to all.

 

[steelyman]

So 60/40 isn't doing well, a lot of assets are not doing well. VG Balanced VBIAX is the 60/40 poster boy, it has doen well over time not so much lately.. What fund would would be a better long term fund without trying to time the market (much)?

I have VBIAX in an inherited IRA from which I’ve been taking the minimum distributions (the account is eligible for “stretch”). I’ll make no changes, just ride it out.

 

[daylatedollarshort]

Right now, inflation runs 8.2% YOY. Newly issued bonds have coupon rate of 6% or so. Old bonds have YTM also of around 6% (they trade below par).

The yield is lower than the current inflation rate, because bond traders expect the inflation rate to drop. If inflation stays high for a longer time, the newly issued bonds will look bad. If inflation drops, people who buy bonds now will be dancing with joy. What will it be?

In order to buy bonds with YTM of 6%, where does one get the money? Unless he is still working and has income to invest, he has to sell something to raise cash. Whatever he sells, bonds or stocks, he sells low to buy low. I am not sure how he wins.

Many of us who owned bond funds previously sold at the beginning of the year when prices were still high, and are now buying individual bonds. Every $500K someone has in nominal bonds at 6% is now earning $30K, which is a lot more interest than when rates were near zero and $80K more than a net loss of -$50K in a bond fund. TIPS are earning 1.5% - 1.9% plus CPI inflation of over 8%. Real rates are continually improving with The Fed raising interest rates to lower inflation, so are unlikely to stay negative for too much longer. Most folks in the Golden Period thread are keeping their maturities short, except for TIPS where the real yield is already positive. We went over how people can come out ahead with high inflation in the Social Security increase thread, so I won't rehash that discussion here, but the basics for me are my inflation adjusted income (SS and TIPS) is greater than my expenses subject to inflation (low fixed mortgage and capped property taxes), and my house will generally keep up with inflation and increase my NW. Even if a 6% nominal bond rate has a negative real yield, I still benefit from investing the mortgage amount by having a fixed rate mortgage under 3%.

Related link: Home owners benefiting from high inflation - https://www.marketwatch.com/story/h...ight-now-economist-says-heres-why-11657881829 - "Inflation may be at a 41-year high of 9.1% in June, thanks to rising gas and food prices, but asset holders such as homeowners who have locked in a fixed-rate mortgage may actually benefit from home price appreciation".

 

[youbet]

Every $500K someone has in nominal bonds at 6% is now earning $30K

Help me will ya? Where are you finding these high quality, short maturity bonds yielding 6%?

 

[daylatedollarshort]

Help me will ya? Where are you finding these high quality, short maturity bonds yielding 6%?

I just used 6% because that is the number NW-bound used in his post I was replying to. I am getting that with a blend of TIPS and Treasuries. For 6% on nominals only you have to check in with Freedom56 in his Golden Period thread.

With the Fed likely raising the federal funds rate to 4.5% to 5%, or more, those rates might not be hard to find before too long - https://www.reuters.com/markets/us/feds-daly-comfortable-with-45-5-fed-policy-rate-2023-2022-09-29/.

 

[NW-Bound]

One thing that in another thread and in an exchange with Freedom56, I suggested that perhaps one advantage of holding individual bonds vs. a bond fund is that you control the buying/selling.

Basically, my premise is this. If you want to buy/hold, but your fellow bond fund shareholders are bailing out en masse, the fund manager has no choice but to sell low to raise cash to meet redemption. And because bonds are not as liquid as stocks, this can cause further price depression.

Now, how do I find data to prove/disprove this theory? It should be possible to build a sample bond ladder, and hold every bond to maturity, and add up the coupons to see how it looks compared to BND. I just don't know where to get the data to do that.

 

[NW-Bound]

Many of us who owned bond funds previously sold at the beginning of the year when prices were still high, and are now buying individual bonds...

This is market timing, and I have been a self-proclaimed market timer but with stocks.

Yes, market timing can give you good returns. The hard part is to be able to do it consistently, year after year.

 

[COcheesehead]

Help me will ya? Where are you finding these high quality, short maturity bonds yielding 6%?

You added the word “short” so let’s not twist the original post, but I just bought two 6% 5 year duration bonds at par.

 

[NW-Bound]

As mentioned, never a bond trader, but I looked for some data for discussion on this thread, and saw bonds maturing in a few years selling under par to have YTM of 6%.