Bond returns prior to 1980 [non-US]

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Bond returns prior to 1980 [non-US]

Postby Hallman » Fri May 17, 2013 6:33 pm

I'm writing this on my phone, making it hard to organize my post. If it looks scrambled, I'll fix it on my computer later.

I'm a 48 years old non US investor with a 7 figure portfolio (usd) in 100% equities (almost all invested in an index fund tracking MSCI World) My plan is to keep it this way, but I'm open to suggestions. I'll have a pension that will afford me a nice lifestyle, my investments will be gravy on top.I had a question about bonds and my son recommended I direct it to you guys.

(i) Were bonds considered a good investment prior to the 30 year long boom we're in now? Looking at the return numbers here: http://personalbizfinance.com/pbf/data/real_return_start_end.pl?STOCK=0&BOND=100&MMF=0&GOLD=0&REBAL=on&RET_TYPE=REAL&PREC=1&REQ_RET=0&HIGH_YR=0&action=Refresh and for various countries here(page 35 and onward): http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf, it seems as though bonds were producing negative to very low returns during 1900 - 1980. Am I missing something?
Hallman
 
Posts: 35
Joined: Fri May 17, 2013 5:25 pm

Re: Bond returns prior to 1980 [Portfolio help: non-US]

Postby LadyGeek » Fri May 17, 2013 7:23 pm

Welcome! By your link, I assume you are in the Eurozone. Have you seen our wiki article? EU investing

Since you are open to suggestions about your investments, I moved your thread into the Investing - Help with Personal Investments forum. (We can answer your bond question here.)
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 18310
Joined: Sat Dec 20, 2008 6:34 pm
Location: Philadelphia

Re: Bond returns prior to 1980 [non-US]

Postby grayfox » Sat May 18, 2013 6:59 pm

Hallman wrote:(i) Were bonds considered a good investment prior to the 30 year long boom we're in now? Looking at the return numbers here: http://personalbizfinance.com/pbf/data/real_return_start_end.pl?STOCK=0&BOND=100&MMF=0&GOLD=0&REBAL=on&RET_TYPE=REAL&PREC=1&REQ_RET=0&HIGH_YR=0&action=Refresh and for various countries here(page 35 and onward): http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf, it seems as though bonds were producing negative to very low returns during 1900 - 1980. Am I missing something?


I don't know the answer to your question, but thanks for that amazing chart.

Maybe the return starting in each year is related to interest rate that year and subsequent years.

Image

Or maybe it has to do with unexpected inflation.
Тише едешь, дальше будешь. (Quieter you-go, further you-will-be.)
User avatar
grayfox
 
Posts: 3923
Joined: Sat Sep 15, 2007 5:30 am
Location: Anytown, USA

Re: Bond returns prior to 1980 [non-US]

Postby grok87 » Sat May 18, 2013 7:27 pm

Hallman wrote:I'm writing this on my phone, making it hard to organize my post. If it looks scrambled, I'll fix it on my computer later.

I'm a 48 years old non US investor with a 7 figure portfolio (usd) in 100% equities (almost all invested in an index fund tracking MSCI World) My plan is to keep it this way, but I'm open to suggestions. I'll have a pension that will afford me a nice lifestyle, my investments will be gravy on top.I had a question about bonds and my son recommended I direct it to you guys.

(i) Were bonds considered a good investment prior to the 30 year long boom we're in now? Looking at the return numbers here: http://personalbizfinance.com/pbf/data/real_return_start_end.pl?STOCK=0&BOND=100&MMF=0&GOLD=0&REBAL=on&RET_TYPE=REAL&PREC=1&REQ_RET=0&HIGH_YR=0&action=Refresh and for various countries here(page 35 and onward): http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf, it seems as though bonds were producing negative to very low returns during 1900 - 1980. Am I missing something?

Hello Hallman and welcome to the forum,
You are asking some good questions. I think Bonds definitely had some long periods of low returns during 1900-1980. From memory there were two different causes:
1) Wartime inflation. If you look at the periods around WWI, WWII and the vietnam war (1970s) you will see bouts of unexpected inflation that led to poor returns for nominal bonds. To some extent one could say investors may be better able to deal with this issue by investing in inflation linked bonds- Ibonds, TIPs etc.

2) Financial repression. There have been periods when governments have held down interest rates to below the rate of inflation to grow their way out of high debt. Post WW II was such a period. Many people think we are in such a period now. It's less clear what to do in this situation.

hope this helps
cheers,
grok, CFA | Danon delenda est
grok87
 
Posts: 6441
Joined: Tue Feb 27, 2007 10:00 pm

Re: Bond returns prior to 1980 [non-US]

Postby nisiprius » Sat May 18, 2013 8:19 pm

In the United States, bonds lost about 50% in real value from about 1940 to 1980, mostly in two bursts: postwar inflation, and the double-digit inflation of the late 1970s and early 1980s. I still can't figure out how to get Excel to do a decent log axis, but the grid lines are at 1, 2, 3, 4, 5, and 6. This is the SBBI data for intermediate-term government bonds, and it includes reinvested interest and is inflation-adjusted. As you see, they were good investments from 1926 to 1940, bad from 1940 to 1980, and good form 1980 on. The big problems were postwar inflation and the late-1970s double-digit inflation.

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 25139
Joined: Thu Jul 26, 2007 10:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bond returns prior to 1980 [non-US]

Postby grok87 » Sat May 18, 2013 9:38 pm

nisiprius wrote:In the United States, bonds lost about 50% in real value from about 1940 to 1980, mostly in two bursts: postwar inflation, and the double-digit inflation of the late 1970s and early 1980s. I still can't figure out how to get Excel to do a decent log axis, but the grid lines are at 1, 2, 3, 4, 5, and 6. This is the SBBI data for intermediate-term government bonds, and it includes reinvested interest and is inflation-adjusted. As you see, they were good investments from 1926 to 1940, bad from 1940 to 1980, and good form 1980 on. The big problems were postwar inflation and the late-1970s double-digit inflation.

Image

Hi nisiprius,
nice chart. I think (as per my post above) that for 1940-1970 its not just a story of post-war inflation, at least if by that you mean unexpected inflation due to the war. Here is a chart of cpi by year
http://www.minneapolisfed.org/community ... st1913.cfm?
For the 1940s I agree. There was pretty horrendously high inflation due to the war.
But inflation for the 1950s averaged only 2%!
so why were real returns for bonds in the 1950s so poor (your chart shows 0% average real return). I think the answer is "Financial repression". There was a deliberate policy to hold down interest rates at or below to the rate of inflation to help work off the enormous wartime debts.
http://touchstoneblog.org.uk/2012/03/fi ... real-wages
cheers,
grok, CFA | Danon delenda est
grok87
 
Posts: 6441
Joined: Tue Feb 27, 2007 10:00 pm

Re: Bond returns prior to 1980 [non-US]

Postby Jack » Sat May 18, 2013 10:53 pm

grok87 wrote:So why were real returns for bonds in the 1950s so poor (your chart shows 0% average real return). I think the answer is "Financial repression".

"Financial repression" is one of those cheap terms like "fascist" or "socialist" that people throw around carelessly with no real understanding of its meaning. It's become quite fashionable lately.

The 50s and 60s were decades of the fastest growth of middle class real incomes in U.S. history. If that is financial repression, then I'd be happy to have lots of it. Of course, what many people call financial repression is nothing of the sort.
Jack
 
Posts: 3228
Joined: Tue Feb 27, 2007 3:24 am

Re: Bond returns prior to 1980 [non-US]

Postby lazyday » Wed May 22, 2013 3:47 am

Some posts have been lost from the forum. Happen to have this one still, pasting it back:
All of what I've read about asset allocation and why a mix of equities and bonds, say 90/10 or 80/20, is more efficient than 100/0 use numbers from the most successful economy in the world, that has a bond market at the end of a bull market that we're very unlikely to experience again during our lives.

Dimson & Marsh in Triumpth of the Optimists, and perhaps in your second link in OP, have done a global study. There were nearly complete equity losses in some places. I don’t recall if they studied the global benefit of balanced portfolios over time.

Also theoretical reasons for many to own fixed income. These are covered in the books. They behave differently than equity, sometimes moving in the oppositte direction, or at least providing relative stability.

I don’t like bonds myself today, and instead use among other instruments, “CD’s” Certificates of Deposit from banks and credit unions, insured by the full faith and credit of the US government. These have a limit of $250,000 per account, so they aren’t practical for institutions, and therefore often carry better terms and/or rates than bonds. For example, many can be redeemed early with low penalty.
I don’t know if similiar are available to you, such as from an EEA country, or from the US.

It seems as though Americans have become accustomed to the idea that salaries won't increase (in real terms) over time. Here in Norway it's taken as a given that the world will progress, continually becoming more modern and salaries and the standard of living will improve.

Some call this Recency Bias. I think wage disinflation, abnormally high profit margins, and the global recession/depression are temporary, and although many things are possible, we will likely have great global wealth in the future. Yet I see a great deal of pessimism in the media.

, there's a good chance the returns won't keep up with the increase in standard of living. I might be mistaken here, perhaps expecting this is naive.

(Edit: Note the missing post from Hallman was here talking about bond returns--though if expected returns from other asset classes are low enough, it could apply there too.)
You’re right, this is a legitimate concern.
W Bernstein has written about the standard of living issue, perhaps on his website.
Wage inflation has over the long term grown faster than (monetary) inflation. If we might wish to purchase services or goods available in the future, then it is not enough to keep up with inflation. I think this could be especially important in health care and leisure.
He has been interviewed in media warning about poor expected returns from bonds.

I'll have a pension that will afford me a nice lifestyle, my investments will be gravy on top.

How secure is your pension? Is it insured by your government? If it is insured, do you trust the insurance? If there is a big financial crisis, could the insurance (or pension) only cover a modest payment of your pension, instead of the expected amount?

Ignoring that, some people estimate the current value of their pension, converting future payments into a present lump sum. This helps their asset allocation decision.
lazyday
 
Posts: 1960
Joined: Wed Mar 14, 2007 11:27 pm

Re: Bond returns prior to 1980 [non-US]

Postby lazyday » Wed May 22, 2013 4:02 am

In an older post, the books I mentioned were

William Bernstein Four Pillars of Investing. From memory: Broad background of history, asset allocation, some coverage of estimating returns. Includes some very long term information and discussion on bonds/bondlike instruments.

David Swensen Pioneering Portfolio Management &/or Unconventional Success.
One or likely both include discussion on rationale for including or excluding asset classes, including ex-US bonds. He discusses alignment and conflict of interests, for example in nations where most bondholders are citizens of the same nation, there is a disincentive to cheat the bondholders.
It is easy to find just the section(s) you are interested in.
lazyday
 
Posts: 1960
Joined: Wed Mar 14, 2007 11:27 pm

Re: Bond returns prior to 1980 [non-US]

Postby Valuethinker » Wed May 22, 2013 7:45 am

grok87 wrote:so why were real returns for bonds in the 1950s so poor (your chart shows 0% average real return). I think the answer is "Financial repression". There was a deliberate policy to hold down interest rates at or below to the rate of inflation to help work off the enormous wartime debts.
http://touchstoneblog.org.uk/2012/03/fi ... real-wages
cheers,


The term 'financial repression' has entered popular parlance. But is perhaps incorrect.

What is happening now, and I believe happened then is:

- Central Bankers saw little threat of inflation
- they were mindful of their mandate to ensure steady economic growth and lower unemployment

I do not think the Fed in the 1940s and 50s *plotted* to keep interest rates below inflation. I think they plotted to keep interest rates low to ensure the US economy kept growing. The post World War 1 recession had been brutal (especially in the UK, but also the US) with widespread unemployment by veterans, wounded veterans begging on streetcorners etc. (the Spanish Flu did not help).

The reasonable expectation post WW2 was that the world would go back into the Depression of the 1930s, given the scale of damage sustained. Germany and Japan in particular could have been expected to have been impoverished for decades by the war and loss of life. There were 10s of millions of displaced persons and Europe was hopelessly divided, China in civil war, much of the third world in the throes of wars of independence, etc.

After WW2 with the dramatic drop in US defence spending the US went into a quick and dramatic recession. However it recovered quickly (partly securing President Truman's reelection in 1948), different from WW1:

- demographic factors, in particular the babies started arriving from late 1945/ early 1946. A demographically thin generation (born 1930-1945) found itself in the workforce with rapidly rising real wages thus could afford to move to the suburbs and make babies throughout the 1950s
- a complete change in consumer finance, allowing veterans to buy houses for the first time-- this was the era of Levittowns
- the GI Bill triggered one of the greatest upskillings in American history, a whole generation gained access to education and jobs they could never have aspired to
- world trade recovered surprisingly quickly particularly once the German economy was decontrolled
- there were no brutal 'reparations' imposed on the losing countries (although the Russians stripped Germany bare in their sector)-- their debts were cancelled
- the Marshall Plan provided the money for the recovering countries to buy US exports-- US manufacturing went into a boom
- new technologies revolutionized consumption-- universal radios (and then TVs), fridges, motor cars, civilian airliners-- the manifold fruits of a decade of accelerated military development eg jet engines

In the early 1950s, the Korean War caused a renewed surge in US spending (and lowered unemployment due to the resumption of military conscription) and also kicked off the long Japanese economic recovery. The whole Cold War period embedded a much higher level of government involvement in the US economy-- defence running 6-8% of GDP plus government funding of science & technology, the Interstate Highway System was probably the largest public works project in history (1-2% of US GDP pa for 15-20 years), and justified in part as a national defence measure. Military conscription permanently lowered unemployment-- every year 2 million young Americans were pulled off the job market to defend the Free World.

What we have now is not 'financial repression' to make government borrowing easier. What we have now is loose monetary policy to try to stimulate economies which are stuck in neutral and are going backward in the European case.

'Financial repression' is simply a description of the effect NOT THE CAUSE and is a politically loaded term, implying that something 'unjust' or 'unfair' is going on, and a nefarious conspiracy to defraud investors.
Valuethinker
 
Posts: 24620
Joined: Fri May 11, 2007 12:07 pm

Re: Bond returns prior to 1980 [non-US]

Postby LadyGeek » Wed May 22, 2013 4:13 pm

As a reminder, economic policy and political discussions are off-topic.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 18310
Joined: Sat Dec 20, 2008 6:34 pm
Location: Philadelphia

Re: Bond returns prior to 1980 [non-US]

Postby Hallman » Mon May 27, 2013 3:33 pm

lazyday wrote:
I'll have a pension that will afford me a nice lifestyle, my investments will be gravy on top.

How secure is your pension? Is it insured by your government? If it is insured, do you trust the insurance? If there is a big financial crisis, could the insurance (or pension) only cover a modest payment of your pension, instead of the expected amount?

Ignoring that, some people estimate the current value of their pension, converting future payments into a present lump sum. This helps their asset allocation decision.


It is insured, and I believe I'll still have a pension when I retire, but I don't think It'll be as good as it is today. The company I work for has a much better pension scheme than most other companies. As it stands now, my government pension and work pension is supposed to equal 2/3 of the average of my highest 10 paid years with the company. On top of that, my wife will receive a "spuse pension" of 1/3 of the figure I receive.

I ordered the books you recommended. Hope they're a good read :happy


I plan to make a new thread with this topic, but I'll post it here as well. The norwegian Ministry of Finance expects long term real returns for government bonds with a 5 year duration to be 2.7% (real estate at 3.5% and equities at 5% real). Seems to contradict all other opinions I've heard.

"Expected real return and volatility in the long run

Government bonds (in the form of a globally diversified government bond portfolio with a duration of around 5 years, and country weights approximately as in the GPFG"s strategic benchmark) is expected to provide an annual real return of 2.5 per cent 1 and volatility of 6 per cent, according to Table 8.1. The expected real return is higher than the historical average for the period 1900-2009, which is 1.1 per cent, according to annual data from Dimson, Marsh and Staunton (2010), see Table 8.3 which shows the historical returns and volatility. At the end of 2007, before the financial crisis had fully impacted the financial markets, the historical average real return was marginally lower (1 per cent). The low historical real return shows that government bonds were a bad investment during several periods in the last century, due to high inflation (or hyperinflation) and wars.
However, the Ministry"s estimate is considerably lower than the real return on government bonds after 1975 (after the collapse of the Bretton Woods fixed exchange rate system), which is a period that may be more relevant to compare with (5.3 per cent real return at the end of 2009, and about the same at the end of 2007). The high real return during this period reflects the battle against inflation and the decline in inflation expectations through the 1980s and 90s, which more than offset losses in the bond markets during the period of high inflation in the 1970s. Given the current situation, where central banks largely aim for low and stable inflation, a recurrence of a similar disinflationary path is not considered the most likely scenario for the coming decades.
The Ministry"s estimate of future long-term real return on government bonds (2.5 per cent) therefore seems reasonable, even after the experiences of 2008 and 2009. The estimate lies between the very low average for the period 1900-2009 and the very high average for the period 1975 to 2009. The estimate is consistent with an expected real return on short duration government bills of 1 to 2 per cent and a term premium of 0.5 to 1.5 per cent. Historically (1900-2009), this term premium has been about 1.4 per cent according to the data set from Dimson, Marsh and Staunton (for government bonds with long duration).
The expected volatility of bonds (6 per cent, see Table 8.1) is lower than the historical volatility, which has been 8.9 per cent in the period 1900 to 2009, see Table 8.3. In the period 1975-2009 volatility was about the same (8.3 per cent). However, the average duration of the GPFG"s government bond portfolio is significantly lower than the duration of the government bonds that are part of the historical return series of Dimson, Marsh and Staunton. It is therefore reasonable to assume a lower volatility for the GPFG"s bond portfolio.
The Ministry therefore keeps unchanged its estimates of the expected real return and risk on the bond portfolio.
Equities (in the form of a globally diversified equity portfolio with country weights approximately as in the GPFG"s strategic benchmark) are expected to yield an average annual real return of 5 per cent (geometric), according to Table 8.1. The historical data set of Dimson, Marsh and Staunton shows that the corresponding historical average for the period 1900-2009 is about 6.3 per cent, as shown in Table 8.3. At the end of 2007 the historical average was 6.7 per cent."

http://www.regjeringen.no/en/dep/fin/Do ... ?id=604755
Hallman
 
Posts: 35
Joined: Fri May 17, 2013 5:25 pm

Re: Bond returns prior to 1980 [non-US]

Postby lazyday » Tue May 28, 2013 1:09 am

Hallman wrote:I ordered the books

Hope you like at least one.

I don’t know how to evaluate the pension, but good that it’s from two sources.
Was thinking about possible reasons for expanding into fixed income or cash.

My planning includes counting on dividends, even if reduced, but never being forced to sell equities at low prices.
You might have similiar thoughts, that even in a depression or crisis, if the pension is not as expected, there will still be dividends.
lazyday
 
Posts: 1960
Joined: Wed Mar 14, 2007 11:27 pm

Re: Bond returns prior to 1980 [non-US]

Postby Hallman » Tue May 28, 2013 7:15 am

lazyday wrote:
Hallman wrote:I ordered the books

Hope you like at least one.

I don’t know how to evaluate the pension, but good that it’s from two sources.
Was thinking about possible reasons for expanding into fixed income or cash.

My planning includes counting on dividends, even if reduced, but never being forced to sell equities at low prices.
You might have similiar thoughts, that even in a depression or crisis, if the pension is not as expected, there will still be dividends.


I'll probably read them during my vacation in june, when I'm done I'll let you know what I think.

We just had a pension reform to lower state pensions, to make us work longer. Even after the reform and if compsny pensions pay nothing (which I can't imagine happening), we'll get about $120k combined at age 67. Without all the costs for kids and a mortgage and because we have free healthcare, we can live nicely on that alone. With the company pension and our equity, we'll live very well.
Hallman
 
Posts: 35
Joined: Fri May 17, 2013 5:25 pm

Re: Bond returns prior to 1980 [non-US]

Postby lazyday » Thu May 30, 2013 1:08 am

That helps explain why you’re so confident without bonds/fixed income/cash.

I suppose you’ve been through markets like 2008-9 without selling, so the psychological reason has been largely addressed. (Some would argue that a decades long decline would be more difficult.)

Were it me, I’d lilkely hold enough FI/cash/etc to nearly eliminate risk of forced equity selling, even if stocks decline over 90% for an extended period, we suffer job losses and/or personal tragedy. Not many years of cash, perhaps one or two (with no luxuries) depending on job possibilities in a terrible economy.

My situation is different, but am somewhat anti-FI myself, and empathise.
lazyday
 
Posts: 1960
Joined: Wed Mar 14, 2007 11:27 pm

Re: Bond returns prior to 1980 [non-US]

Postby Chris M » Thu May 30, 2013 4:04 pm

(i) Were bonds considered a good investment prior to the 30 year long boom we're in now? Looking at the return numbers here: http://personalbizfinance.com/pbf/data/ ... on=Refresh and for various countries here(page 35 and onward): http://www.investmenteurope.net/digital ... al_web.pdf, it seems as though bonds were producing negative to very low returns during 1900 - 1980. Am I missing something?

Hallman,

That's an interesting question. I think what might be happening, particularly in the second link you provide, is that a few years worth of data may be having an outsized influence on the average real return numbers for 1900-1980. Look particularly at Figure 1 for Europe, on p. 60 of the Credit Suisse report. You'll notice real returns on bonds dropped something like 80 or 90 percent, right around 1920. Coming out of World War I, there was a major bout of inflation as the combatants tried, or were forced, to inflate their way out of their war debts. Hyperinflation rendered bonds completely worthless, not just in Germany but in other countries like Austria and Poland. Other European countries, while not quite experiencing hyperinflation, did experience very high levels of inflation. The post-WWI inflation put real returns for European bonds in a deep hole, which they have been digging themselves out of ever since.

If you looked at European bond returns for the period 1925 -1980, you would see an entirely different story emerge. Especially during the Great Depression real bond returns would have looked very nice. If you started the data series back in the 1800s, before the era of modern inflation, you'd also see a very different story. It all depends on when you start and end your data series. As to whether bonds are a "good investment", it all depends on economic conditions at the time. During periods of high inflation and hyperinflation, they're terrible investments, but during periods of deflation they're the best.
Chris M
 
Posts: 88
Joined: Tue May 28, 2013 7:25 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Austintatious, Cash, Engineer, john94549, Meaty, nanook, nosivol, robre and 61 guests