Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

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CULater
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Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by CULater » Tue Oct 23, 2018 7:18 pm

As it turns out, for the decade beginning in 2000 and ending at the close of 2009, U.S. stocks went nowhere. You had a -0.27% compound annual return. It didn't help much even if you had been DCAing in by investing monthly, rather than starting with a lump sum. In that case, you got about a 2% annualized return on your invested capital. Better, but putting the money into a money market fund instead would have netted you about 2.5% per year without the rollercoaster rides.

However, over the "lost decade" a lump sum in intermediate treasuries at the start of 2000 doubled. Had you split equally between stocks and intermediate treasuries, it turns out that your return would have been right in the arithmetic middle between stocks (zero return) and treasuries, even though you rebalanced annually to maintain the 50/50 split. In the "lost decade", bonds saved the bacon. The part in stocks was pretty much dead weight.

Looking forward, if we have another lousy return decade for stocks, which many predict, will bonds save the bacon again? In January 2000, the yield on 5-year treasuries was 6.58%. While the yield has gotten better in recent months, it is now only about 3%, less than half what it was at the start of 2000. I guess we should hope that another "lost decade" for stocks is not in the offing. If it is, seems unlikely that bonds will save anyone's bacon this time around.
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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by UpperNwGuy » Tue Oct 23, 2018 8:29 pm

It's nice to see a post that speaks favorably about bonds for a change. Most recent posts on fixed income have been negative towards bonds. I think this is due to the belief that NAV is all that matters.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by TropikThunder » Tue Oct 23, 2018 8:37 pm

CULater wrote:
Tue Oct 23, 2018 7:18 pm
Looking forward, if we have another lousy return decade for stocks, which many predict, will bonds save the bacon again? In January 2000, the yield on 5-year treasuries was 6.58%. While the yield has gotten better in recent months, it is now only about 3%, less than half what it was at the start of 2000. I guess we should hope that another "lost decade" for stocks is not in the offing. If it is, seems unlikely that bonds will save anyone's bacon this time around.
UpperNwGuy wrote:
Tue Oct 23, 2018 8:29 pm
It's nice to see a post that speaks favorably about bonds for a change. Most recent posts on fixed income have been negative towards bonds. I think this is due to the belief that NAV is all that matters.
Sounds more skeptical than favorable to me. Also, the yield dropped from 6.68% in Jan 2000 to 2.66% in Dec 2009, giving funds that track them (like VFITX) quite a boost.
Last edited by TropikThunder on Tue Oct 23, 2018 8:48 pm, edited 1 time in total.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by Flymore » Tue Oct 23, 2018 8:47 pm

Considering the rising interest rate situation, I think not for the short term.
After some time the rising interest rate will work it's way into bond yield, then bonds may contribute.
IMO, depends on the speed of the rate increases by the fed.
Perhaps the falling stock market will pressure the Fed to slow down the rate increases allowing bonds to catch up.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by Kenkat » Tue Oct 23, 2018 8:51 pm

TropikThunder wrote:
Tue Oct 23, 2018 8:37 pm
CULater wrote:
Tue Oct 23, 2018 7:18 pm
Looking forward, if we have another lousy return decade for stocks, which many predict, will bonds save the bacon again? In January 2000, the yield on 5-year treasuries was 6.58%. While the yield has gotten better in recent months, it is now only about 3%, less than half what it was at the start of 2000. I guess we should hope that another "lost decade" for stocks is not in the offing. If it is, seems unlikely that bonds will save anyone's bacon this time around.
UpperNwGuy wrote:
Tue Oct 23, 2018 8:29 pm
It's nice to see a post that speaks favorably about bonds for a change. Most recent posts on fixed income have been negative towards bonds. I think this is due to the belief that NAV is all that matters.
Sounds more skeptical than favorable to me. Also, the yield dropped from 6.68% in Jan 2000 to 2.66% in Dec 2009, giving funds that track them (like VFITX) quite a boost.
Following the trend, we just need bonds to drop from 2.66% to -4.64% to achieve similar results.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by aristotelian » Tue Oct 23, 2018 8:59 pm

You seem to be assuming that a market crash is imminent while the 10 year is sitting at 3.1%. The Fed seems to think the economy is strong and they are going to continue raising rates.

Maybe bonds don't perform as well, but I can't think of any other asset that I would want to balance stocks.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by nisiprius » Tue Oct 23, 2018 9:15 pm

Since I don't know what the next decade for stocks will be like, and I don't know what the next decade for bonds will be like, I don't know whether bonds will "save the bacon again" or not.

Every year, Larry Swedroe makes a list of the "sure things," consensus expectations that everybody agrees about, and then tracks how they turn out. This has actually been a good year for gurus so far, but overall, 2010-2018, adding in this year's results so far, of a total of 69 "sure things," only 22 actually happened, 43 turned out to be false, and 4 were "ties/draws." That's just looking one year ahead.

In April 2014, Bloomberg surveyed 68 economists on what they thought the ten-year Treasury rate would be six months later. 68 out of 68 the rate would rise, the only disagreement being how much. Not one thought the rate would fall. It fell.

How people think they can forecast ten years in advance, and why people think they should base actions on such forecasts, I don't know.

It continues to be true that stocks represent participation in a business which may do well or poorly, and guarantee nothing, while bonds represent legally enforceable contracts to pay out specific numbers of dollars on specific days. That's not a prediction, that's the fundamental nature of equity and debt. That in itself seems to me to be a good reason to hold some meaningful bond allocation.

P.S. In 1998 my employer hosted a retirement planning workshop conducted by Fidelity and we went through a workbook. In that workbook, we assumed that stocks would return about 7% real, bonds IIRC 3% real. In actually, 2000-2009, stocks earned -3.38% real, intermediate-term bonds +3.56% real. Bonds "saved the bacon" if you simply mean turning a dollar loss into a dollar gain, but they hardly "saved the bacon" if your planning was based on stocks earning a 7% return--particularly if you didn't have a very large bond allocation.
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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by CULater » Tue Oct 23, 2018 10:20 pm

Nobody is forecasting anything here. Just pointing out that if stocks disappoint over the next decade, the low current yields on bonds don't seem to provide much juice to compensate for poor stock returns, as they were able to during the 2000-09 decade. Rates falling from 6.6% to 2.6% isn't happening again soon. There's also the chance that rates could go back to 6.6% from their current level, which would mean little or negative gains from bond investments. Stocks might have to save the bond bacon the next time, and that's a lot to expect from current price levels. Good luck to us all.
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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by warowits » Tue Oct 23, 2018 10:46 pm

I never understand measuring peak to trough like this. Sure if I put in a lump sum at the peak and evaluated how I had done on the lowest part of the trough, it looks grim. But this is the least meaningful analysis, and not the lived experience of anyone I have ever met. Why ignore the huge run up to 2000 and the huge run up after 2009? Stock returns aren’t linear, and if you cut off the years with the big returns, it will look bad.
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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by visualguy » Tue Oct 23, 2018 11:26 pm

aristotelian wrote:
Tue Oct 23, 2018 8:59 pm
Maybe bonds don't perform as well, but I can't think of any other asset that I would want to balance stocks.
Direct real estate for me and quite a few others here...

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by visualguy » Tue Oct 23, 2018 11:29 pm

warowits wrote:
Tue Oct 23, 2018 10:46 pm
I never understand measuring peak to trough like this. Sure if I put in a lump sum at the peak and evaluated how I had done on the lowest part of the trough, it looks grim. But this is the least meaningful analysis, and not the lived experience of anyone I have ever met. Why ignore the huge run up to 2000 and the huge run up after 2009? Stock returns aren’t linear, and if you cut off the years with the big returns, it will look bad.
Yes, but it's pretty common for people to put aside a lot more toward retirement later in their working career than earlier. If you get unlucky and it's a bull market when you invest much of your money, and then you hit a long bear or a couple of bears in a row when you retire, it's pretty grim...

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by carolinaman » Wed Oct 24, 2018 7:48 am

I assume there were a lot of capital gains in bonds during the decade due to declining rates. When we have another bear market for stocks, that scenario will likely not recur. Interest rates may hold steady or decline some, but nothing like the 00s. Of course most people hold bonds for safety, not return.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by CULater » Wed Oct 24, 2018 8:28 am

warowits wrote:
Tue Oct 23, 2018 10:46 pm
I never understand measuring peak to trough like this. Sure if I put in a lump sum at the peak and evaluated how I had done on the lowest part of the trough, it looks grim. But this is the least meaningful analysis, and not the lived experience of anyone I have ever met. Why ignore the huge run up to 2000 and the huge run up after 2009? Stock returns aren’t linear, and if you cut off the years with the big returns, it will look bad.
If you had anything invested at the start of 2000 you had a lump sum at the beginning, and you still had to live through those 10 years, no matter where you started and where you are now. That was the lived experience of most people I've met. If there's another decade like that coming up for stocks, that will be the case too. But maybe harder without as much help from bonds.
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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by Sandtrap » Wed Oct 24, 2018 8:32 am

1. Yes or no. (certainly seems there's no "bacon saving" at the moment)

2. What are the alternatives?

3. All the more reason for diversification of "fixed", diversification of "income streams", and diversification of "asset base"?

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by protagonist » Wed Oct 24, 2018 8:39 am

I wouldn't count on bonds saving the day. As was pointed out, bonds were at 6-7% in 2000 -yields had plenty of room to fall. They don't have very far to fall today but have unlimited room to rise. Plus, rising yields on Treasuries are the plan, and corporate bonds typically follow suit.

I believe CDs are safer these days. The sweet spot for CD investments is only about 2 years these days which mitigates risk of inflation. You certainly won't get rich with them, but you won't lose your shirt either. I'm comfortable accepting a boring, guaranteed ~3% yield for 2 years and then reassessing. If stocks fall 50% or more that certainly won't "save the bacon". If they do, hopefully you have a steady, secure income and/or enough of a cushion to ride it out. Nobody ever said the stock market was not risky.

No matter what you do, these days the realistic goal with fixed income is keeping up with inflation within that part of your portfolio, not making money. And even that might be a challenge.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by TN_Boy » Wed Oct 24, 2018 9:22 am

CULater wrote:
Tue Oct 23, 2018 7:18 pm
As it turns out, for the decade beginning in 2000 and ending at the close of 2009, U.S. stocks went nowhere. You had a -0.27% compound annual return. It didn't help much even if you had been DCAing in by investing monthly, rather than starting with a lump sum. In that case, you got about a 2% annualized return on your invested capital. Better, but putting the money into a money market fund instead would have netted you about 2.5% per year without the rollercoaster rides.

However, over the "lost decade" a lump sum in intermediate treasuries at the start of 2000 doubled. Had you split equally between stocks and intermediate treasuries, it turns out that your return would have been right in the arithmetic middle between stocks (zero return) and treasuries, even though you rebalanced annually to maintain the 50/50 split. In the "lost decade", bonds saved the bacon. The part in stocks was pretty much dead weight.

Looking forward, if we have another lousy return decade for stocks, which many predict, will bonds save the bacon again? In January 2000, the yield on 5-year treasuries was 6.58%. While the yield has gotten better in recent months, it is now only about 3%, less than half what it was at the start of 2000. I guess we should hope that another "lost decade" for stocks is not in the offing. If it is, seems unlikely that bonds will save anyone's bacon this time around.
I don't think bonds are going to save our bacon if we have another big stock crash, at least short term, because as you say, bond yields are much lower now.

Of course, you cherry-picked two crash dates. What was the return from 1998 to 2011? Without looking, I suspect things were much better.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by CULater » Wed Oct 24, 2018 9:45 am

For the 2000-09 period, you would have earned an annualized 3.4% with a mix of 60/40 stocks and intermediate treasuries. Good old fashioned money market would have given you 2.8% annualized. If stocks return little or nothing during the next decade and bonds return half of what they returned in the "lost decade" the annualized return for 60/40 would be about 2.7% (nominal). Might be a real return of zero, if inflation doesn't exceed that during the period. Everyone's risk tolerance should include the possibility of another "lost decade" IMO, if not something even worse than that.
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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by rich126 » Wed Oct 24, 2018 10:14 am

protagonist wrote:
Wed Oct 24, 2018 8:39 am
I wouldn't count on bonds saving the day. As was pointed out, bonds were at 6-7% in 2000 -yields had plenty of room to fall. They don't have very far to fall today but have unlimited room to rise. Plus, rising yields on Treasuries are the plan, and corporate bonds typically follow suit.

I believe CDs are safer these days. The sweet spot for CD investments is only about 2 years these days which mitigates risk of inflation. You certainly won't get rich with them, but you won't lose your shirt either. I'm comfortable accepting a boring, guaranteed ~3% yield for 2 years and then reassessing. If stocks fall 50% or more that certainly won't "save the bacon". If they do, hopefully you have a steady, secure income and/or enough of a cushion to ride it out. Nobody ever said the stock market was not risky.

No matter what you do, these days the realistic goal with fixed income is keeping up with inflation within that part of your portfolio, not making money. And even that might be a challenge.
I agree with you. At least with CD like investments you may tread water with inflation, bonds just seem destined to go down. I've never been a big bond person anyhow but as I get closer to retirement I'd like to diversify away from stocks. In the current environment I just don't see it making since buying bonds for me, CDs maybe, keeping money in cash, but it is a tough environment to invest in, if you will think you'll be retired in 5 yrs. Now maybe this spike in rising rates will end within a year and bonds will end up being ok. Hard to say right now.

I really don't think the economy is that strong but the FED is trying to buy themselves some room with rising rates so that if things start tanking, they can actually lower them. For a while the rates were so low, it would have been impossible to lower them anymore to try and stimulate the economy.

Much of the current corporate profits seem to be from the tax cuts than a strong growing economy. And any wage growth is largely offset by rising health costs and housing. Now its possible that if the US is allow less working visas, etc. that is causing the supply of workers to go down and may trigger some wage growth due to a shortage of workers. And with all of the trade stuff going on, that creates another unknown situation in the economy. I've never been a gold person but if I was, this may be a decent time to buy a small amount.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by oldcomputerguy » Wed Oct 24, 2018 11:56 am

UpperNwGuy wrote:
Tue Oct 23, 2018 8:29 pm
It's nice to see a post that speaks favorably about bonds for a change. Most recent posts on fixed income have been negative towards bonds. I think this is due to the belief that NAV is all that matters.
I think it also might be that we've had ten years of increasing stock gains, which brought out all the "100% stocks" posts, and now the ongoing decline is making those folks realize that the market isn't always gonna go up.
:shock:
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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by HomerJ » Wed Oct 24, 2018 12:16 pm

protagonist wrote:
Wed Oct 24, 2018 8:39 am
I wouldn't count on bonds saving the day. As was pointed out, bonds were at 6-7% in 2000 -yields had plenty of room to fall. They don't have very far to fall today but have unlimited room to rise. Plus, rising yields on Treasuries are the plan, and corporate bonds typically follow suit.
If there's a serious prolonged crash, the Fed will lower rates, and there will be a "flight to safety" in U.S. Treasury bonds.

A 50/50 portfolio will likely indeed be "saved" by bonds. The bonds may not gain a ton, but they won't lose a lot, and will give a retiree time to wait for the stock market to recover.

Inflation is more of a worry to me than a stock market crash.
I believe CDs are safer these days. The sweet spot for CD investments is only about 2 years these days which mitigates risk of inflation. You certainly won't get rich with them, but you won't lose your shirt either. I'm comfortable accepting a boring, guaranteed ~3% yield for 2 years and then reassessing. If stocks fall 50% or more that certainly won't "save the bacon". If they do, hopefully you have a steady, secure income and/or enough of a cushion to ride it out. Nobody ever said the stock market was not risky.
I agree, having a decent cushion in short-term bonds or CDs is a good idea.
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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by UpsetRaptor » Wed Oct 24, 2018 12:30 pm

protagonist wrote:
Wed Oct 24, 2018 8:39 am
I wouldn't count on bonds saving the day. As was pointed out, bonds were at 6-7% in 2000 -yields had plenty of room to fall. They don't have very far to fall today but have unlimited room to rise. Plus, rising yields on Treasuries are the plan, and corporate bonds typically follow suit.

I believe CDs are safer these days. The sweet spot for CD investments is only about 2 years these days which mitigates risk of inflation. You certainly won't get rich with them, but you won't lose your shirt either. I'm comfortable accepting a boring, guaranteed ~3% yield for 2 years and then reassessing. If stocks fall 50% or more that certainly won't "save the bacon". If they do, hopefully you have a steady, secure income and/or enough of a cushion to ride it out. Nobody ever said the stock market was not risky.

No matter what you do, these days the realistic goal with fixed income is keeping up with inflation within that part of your portfolio, not making money. And even that might be a challenge.
The problem with CDs is that most 401k/403b/457 tax deferred accounts, where many prefer to keep their fixed income allocation, do not have CDs available. And keeping a CD in a taxable runs into the issue of the income being taxed as regular income.

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Re: Bonds saved the bacon in the "lost decade" for stocks, but will they do it again?

Post by heyyou » Wed Oct 24, 2018 3:40 pm

Being retired, my bond allocation is for spending when stock prices are depressed, with ten plus years of spending just sitting there waiting. Max SS starts in 18 months. So far, my ignorance about the future has yet to cause problems. We retired expecting to adapt to variable future income.

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