Bonds Outpacing Stocks This Century

[targatom2019]

Agreed. I know that the religion around here is “set your allocation and leave it alone,” but I’ll argue that if you believe that basically all asset classes are overvalued and this is due to central bank manipulation of interest rates (artificially suppressing rates which makes all other asset classes “look” cheaper) then it’s perfectly ok to hold a large amount of cash, or gold, or whatever you think is a store of value and wait until asset prices are at a level you’d consider sustainable. In other words, I’d rather earn 0% for a while rather than bet big on assets classes that I still think are over valued. (Let the assaults begin as I’m called a dirty market timer and people school me on their personal buy and hold forever stories.)

so when did you sell and are you planning to get back in ?

 

[Freedom56]

how do you come up with that conclusion ?

I believe we are entering a secular bear market. If you want to know what a secular bear market looks like, take a look at the XLE, it has been in one for the past 6 years and it's still not over. About 70% of GDP is consumer spending and consumer debt is at a record high. Until a vaccine is found, many consumers are not going to be in the mood to travel, go to concerts, movies, restaurants. Unemployment is already over 15% and will likely climb over 22%. Many of those jobs are never coming back. Businesses are not going to flip a switch and hire everyone back if they have no idea of demand for their products or services. This country will get through this but many businesses will not. Airlines have filed for bankruptcy in the past and survived, but equity holders always get wiped out . In a low growth environment, PE ration compression is all but inevitable. Many stocks are still horribly overpriced. Many companies have spent the past decade buying back shares and adding to their debt. When the CEO of a major bank like JP Morgan warns of a potential dividend suspension under an extreme scenario, they obviously have looked ahead to what may happen. I don't own equities, equity funds or bond funds, and this is the first time in 30 years that I'm starting to get defensive with my bond holdings and raising cash. My current allocation is 30% cash and 70% corporate bonds and CDs. I will use the government corporate bond buying program to liquidate another 10% of my holdings to bring me up to 40% cash. Many of the beaten up stocks may have rallied a lot in percentage terms over the past 3 weeks, but the price action of their bonds tell a story of impending defaults. There is nothing wrong with holding excess cash or CDs in such an environment.

 

[targatom2019]

I believe we are entering a secular bear market. If you want to know what a secular bear market looks like, take a look at the XLE, it has been in one for the past 6 years and it's still not over. About 70% of GDP is consumer spending and consumer debt is at a record high. Until a vaccine is found, many consumers are not going to be in the mood to travel, go to concerts, movies, restaurants. Unemployment is already over 15% and will likely climb over 22%. Many of those jobs are never coming back. Businesses are not going to flip a switch and hire everyone back if they have no idea of demand for their products or services. This country will get through this but many businesses will not. Airlines have filed for bankruptcy in the past and survived, but equity holders always get wiped out . In a low growth environment, PE ration compression is all but inevitable. Many stocks are still horribly overpriced. Many companies have spent the past decade buying back shares and adding to their debt. When the CEO of a major bank like JP Morgan warns of a potential dividend suspension under an extreme scenario, they obviously have looked ahead to what may happen. I don't own equities, equity funds or bond funds, and this is the first time in 30 years that I'm starting to get defensive with my bond holdings and raising cash. My current allocation is 30% cash and 70% corporate bonds and CDs. I will use the government corporate bond buying program to liquidate another 10% of my holdings to bring me up to 40% cash. Many of the beaten up stocks may have rallied a lot in percentage terms over the past 3 weeks, but the price action of their bonds tell a story of impending defaults. There is nothing wrong with holding excess cash or CDs in such an environment.

so when did you sell and when are you planning to get back in ? I am just curious if you went through the 2000 bust and 2008 Great Recession.

 

[COcheesehead]

Fear and investing are never a good combination.

 

[Freedom56]

so when did you sell and when are you planning to get back in ? I am just curious if you went through the 2000 bust and 2008 Great Recession.

I have been investing in fixed income for 30 years (bonds, CDs, preferred stocks). I was actually buying during the sell-off - read my posts. I always buy during sell-offs. I always time my bond purchases, this is why I hold a large percentage of cash. I receive coupon payments 8 of 12 months of the year and add that to my cash reserves. With so many passive bond funds around their behavior is very predictable during market sell-offs. I know that bond funds will sell the good with the bad when they have to raise cash. I just put low ball limit orders well below par with attractive and YTM. Many good quality corporate bonds were selling at a large discount to par during this recent sell-off. After the Federal Reserve announced the purchase of corporate bonds, the bond market stabilized and started climbing up. I decided to sell my holdings of financial company bonds/notes and have been selling those over par during the past week. Those bond funds that were liquidating bonds mid March at 82 to 90 cents on the dollar were busy buying them back over par last week.

During the period 1990 - 2007 I was holding Jumbo CDs. Yields were more attractive then. From 2007 to 2010 I was holding CDs and 10 year notes. I switched to corporate bonds for more yield from 2010-2020. There were several periods from 2010 to 2020, where corporate bonds were just too expensive and I had too much cash, so I bough FDIC insured CDs. I also bought and sold preferred stocks and preferred CEFs during that period but my core holdings were corporate bonds and FDIC insured CDs.

 

[pb4uski]

^^^^ So when, if ever, have you invested in common stock? (Say, over 50% of your portfolio).

 

[Freedom56]

^^^^ So when, if ever, have you invested in common stock? (Say, over 50% of your portfolio).

After I graduated from university and started my career in the technology field, I and others had the misfortune of meeting a full service broker who sold us on stocks that were perennial losers. This was in the early 80's. I never had 50% of my money ever in equities. I dumped the broker and opened an account with a discount broker and put money into CDs. Interest rates were very high in the early 80's and it made no sense to invest in the market. I became a self directed investor from then on and never looked back.

 

[pb4uski]

So is it fair to say that you have not had any significant investments in common stocks for the last 40 years?

 

[Freedom56]

So is it fair to say that you have not had any significant investments in common stocks for the last 40 years?

That is correct. The company 401K matching was in the company stock fund but I converted that to stable value my contributions were invested in treasuries. My taxable investments were in CDs, bonds, treasuries and other fixed income securities. I always sold my company stock grants after they vested.

Don't assume that stocks are the only path to wealth creation. Most create wealth through real estate, as business owners, rental properties, saving and conservative investment.

 

[njhowie]

A lot of those stone throwers are going to become Walmart greeters.

Walmart is going to be furloughing greeters along with a lot of other employees. Local Walmarts have cut store hours to 7AM-8:30PM - many were 24 hours.

 

[Freedom56]

Walmart is going to be furloughing greeters along with a lot of other employees. Local Walmarts have cut store hours to 7AM-8:30PM - many were 24 hours.

Okay... Costco receipt checkers or customer counters then.

 

[Montecfo]

Actually, you got it wrong. If you had titled the thread Bonds Outpacing S&P 500 This Century then you had a valid argument.... but you titled the thread Bonds Outpacing Stocks this Century... and that is false.... stocks are ahead of bonds by 0.08% through March 31... and probably even more today.

Your chart.... but adding Vanguard Total Stock, which is more reflective of stocks in total, rather than the S&P 500 which is just large cap stocks.

I believe the Dow and Nasdaq have also beaten bonds the Nasdaq by a very wide margin.

These are also "stocks".

So bottom line: it is interesting though limited.

 

[Montecfo]

Actually, you got it wrong. If you had titled the thread Bonds Outpacing S&P 500 This Century then you had a valid argument.... but you titled the thread Bonds Outpacing Stocks this Century... and that is false.... stocks are ahead of bonds by 0.08% through March 31... and probably even more today.

Your chart.... but adding Vanguard Total Stock, which is more reflective of stocks in total, rather than the S&P 500 which is just large cap stocks.

I believe the Dow and Nasdaq have also beaten bonds the Nasdaq by a very wide margin.

These are also "stocks".

So bottom line: it is interesting though limited.

 

[Perryinva]

Agree this is an interesting thread. Too deep for me. I was a late comer to investing, and am absolutely not well versed in the intricacies that are being discussed here. In my mid 50’s I came to the realization that I missed the boat on what path I should have taken to be wealthy, instead choosing safe & comfortable. And enjoyable. So at 62 & retired for 10 months, I know I will never be an 8 figure millionaire, unless it is by a lottery ticket. But since I went from negative NW in 1994 to solid low 7 figures on an engineers pay that became a final salary of about $160k, and will continue to get that “more than I ever thought I would ever make” pay for the rest of my life, I’m going to call it a win. It ain’t $300k+/yr, but good enough to do about anything I would want to do. I was 75-95% equities from about 2000 on until I retired, because it seemed to make sense for best long term growth. I am not as concerned about Growth now, more like inflation protected retention as my plan is to spend it, not leave it, as there is no one I want to leave it to. So something like 40/25/35 is looking good to me based on much of the over my head discussing here, so thanks for doing the hard thinking for me guys!

 

[Markola]

I believe the Dow and Nasdaq have also beaten bonds the Nasdaq by a very wide margin.



These are also "stocks".



So bottom line: it is interesting though limited.

I agree but I demonstrated that over the last two decades they are essentially tied.

Is your portfolio 100% stock, then? If so, how reliant is your retirement on your portfolio and how soon will you retire? Maybe you have a cast iron constitution that I don’t have.

My retirement is 100% reliant on my portfolio and SS and I’m 54, aiming for a gradual FIRE over the next 8-10 years. I find I’m comfortable with a 50/50 allocation given my belief that no one convincingly knows anything about the next 20 years any more than they did the last 20.

I choose to buy the casino rather than play in it.

 

[Montecfo]

I agree but I demonstrated that over the last two decades they are essentially tied.

Is your portfolio 100% stock, then? If so, how reliant is your retirement on your portfolio and how soon will you retire? Maybe you have a cast iron constitution that I don’t have.

My retirement is 100% reliant on my portfolio and SS and I’m 54, aiming for a gradual FIRE over the next 8-10 years. I find I’m comfortable with a 50/50 allocation given my belief that no one convincingly knows anything about the next 20 years any more than they did the last 20.

I choose to buy the casino rather than play in it.

The AGG and the S&P 500 are tied yes. I do not own the S&P 500.

I do not have a pension. I am retired. My equity allocation is 60-70 percent.

I find I am better off looking at equities as a whole instead of a 500 stock index, and looking at periods other than the most recent two decades when setting asset allocation.

 

[audreyh1]

I find, since I retired when the market was extreme bubble-like in 1999, is that a conservative approach* to AA works for me in all market conditions. Every nasty market event since has reinforced this approach for me. By staying conservative, when the sudden shock of a nasty event occurs I generally feel like I’m well positioned and don’t feel panicky.

* My conservative approach is a 50/50 allocation with a decent chunk of cash in the fixed income portion. Obviously some folks would not consider 50% equity as conservative, but it’s the lowest I have been willing to go.

 

[Markola]

+1. You gotta sleep at night. I’ve evolved to the same 50/50 comfort level, gradually drifting down to reach it in November 2018, fortunately. I have since experienced a few pangs of fear of missing out but not since February 2020! FOMO has been replaced with relief and gratitude.

Some above noted the difference between the total domestic stock index (Portfolio 1) and the S&P 500 index (2). Granted, there has been an advantage to the total stock index so far this century. Fortunately, we own the total index.

 

[audreyh1]

+1. You gotta sleep at night. I’ve evolved to the same 50/50 comfort level, gradually drifting down to reach it in November 2018, fortunately. I have since experienced a few pangs of fear of missing out but not since February 2020! FOMO has been replaced with relief and gratitude.

Some above noted the difference between the total domestic stock index (Portfolio 1) and the S&P 500 index (2). Granted, there has been an advantage to the total stock index so far this century. Fortunately, we own the total index.

View attachment 34640

I didn’t experience FOMO during the 2017 or 2019 run ups, because I was getting a nice return on the 50% I did have invested in equities. Plus bond funds did very well in 2019. My feelings in 2019 were more like - oh, no! the market is getting even more frothy! And I determinedly took the profits to rebalance on Jan 2, even though there were taxable gains involved.