WSJ: Sometimes, It’s Bonds For the Long Run

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vineviz
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WSJ: Sometimes, It’s Bonds For the Long Run

Post by vineviz »

Jason Zweig has a new article in the Wall Street Journal entitled "Sometimes, It’s Bonds For the Long Run" summarizing recent research by Edward McQuarrie, a retired business professor at Santa Clara University.

WSJ article (may be behind a paywall): https://www.wsj.com/articles/sometimes- ... 1541176880

McQuarrie's paper is titled "The First Eighty Years of the US Bond Market: Investor Total Return from 1793, Combining Federal, Municipal, and Corporate Bonds". The gist is that during the 19th century bonds performed much better than the data cited by Jeremy Siegel in his writing, to the point that bond returns were regularly higher than stock returns.

https://papers.ssrn.com/sol3/papers.cfm ... cle_inline

From Zweig:
Maybe investors should question the dogma of “stocks for the long run.” History shows that a portfolio of bonds has outperformed stocks surprisingly often and for shockingly long periods.

That’s the intriguing argument in a new research paper by Edward McQuarrie, a retired business professor at Santa Clara University. Investors have long taken it as an article of faith that stocks have always beaten bonds—and always will—if you can just hang on long enough. Prof. McQuarrie’s research is a healthy reminder that this belief is wrong. His findings also show the limits and dangers of extrapolating from the past.

Stocks offer a stake in a business’s variable profits in the indefinite future. Bonds are contracts conferring rights to a fixed stream of income over a certain period. If stocks didn’t offer the prospect of higher return, investors wouldn’t want to brave the uncertainty of owning them. But whether stocks deliver that higher return depends largely on how they are priced relative to bonds.

The popular belief that there’s never been a 30-year period in which stocks had lower returns than bonds is false. As recently as 2011, bonds had earned higher returns than stocks over the prior 30 years (long-term Treasury bonds, 10.7% annually; U.S. stocks, 10.4%).

That’s no aberration, says Prof. McQuarrie. Using digitized antique newspapers to supplement an online database of U.S. stock and bond prices, he assembled an index of bonds back to 1793.

That has enabled him to calculate 30-year returns beginning in 1823. Between then and 2013, he shows, bonds earned higher returns than stocks in one-quarter of all 191 three-decade-long periods.
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Questioning the Dogma of "Stocks for the Long Run"

Post by cnh »

[Thread merged into here, see below. --admin LadyGeek]

In The Wall Street Journal yesterday, Jason Zweig reported (“Sometimes, It’s Bonds For the Long Run” https://www.wsj.com/articles/sometimes- ... 1541176880) on a recently published study that in part casts doubt on the stocks-for-the-long-run canon, which also seems a significant part of the Boglehead philosophy. Zweig’s article begins as follows: “Maybe investors should question the dogma of ‘stocks for the long run.’ History shows that a portfolio of bonds has outperformed stocks surprisingly often and for shockingly long periods.”

Zweig’s article cites a study, (https://papers.ssrn.com/sol3/papers.cfm ... cle_inline) “The First Eighty Years of the US Bond Market: Investor Total Return from 1793, Combining Federal, Municipal, and Corporate Bonds,” by Edward F. McQuarrie, a retired professor of business from Santa Clara University’s Leavey School of Business.

Abstract:
“US securities markets took root after Alexander Hamilton’s refunding of the Federal debt in the early 1790s. Accordingly, a market in bonds has been in operation in the US for over two centuries. Until recently, however, little was known about the bond market prior to 1857. This paper focuses on investor holding period returns, using newly compiled data on bond prices, rather than focusing on the movement of yields, as in Homer (1963). It incorporates the relatively familiar Treasury securities from before President Andrew Jackson paid off the debt in 1835, but also includes state and city debt, which ballooned beginning in the 1820s, as well as corporate debt, from its beginnings about 1830 to its explosion after 1850. I find that all three classes of bonds provided investors with similar total returns, excepting a brief period in the 1840s when state securities plunged before recovering. I also find that real returns in the eight decades following 1793 were generally higher than the long-term average return of 3.6% proposed for bonds in Siegel (2014). I further find that in these early years, bonds sometimes out-performed stocks over periods of several decades, again contrary to Siegel’s thesis. The paper considers the implications of a demonstration that stocks and bonds performed differently in the nineteenth century as compared to the twentieth century.”

The article and the study seem to raise a number of interesting propositions:
- Both McQuarrie’s and Siegel’s studies (and in my view pretty much all thinking and guidance on investment portfolio design) rely on analysis of historical (i.e., past) performance of investment vehicles. However, given that “past performance is no guarantee of future results,” which one finds in every investment vehicle prospectus and quite often on this forum, is there really any logic to adhering to any of the resulting guidance relating to portfolio design/allocation (e.g., the time-honored 60/40 balanced portfolio, “your age in bonds,” target retirement allocations, etc.)?
- Stated more simply, if “past performance is no guarantee of future results” and if all—or at least most—guidance on portfolio design/allocation derives from analyses of past performance and if one is designing a portfolio to achieve some desired future results, then what logical basis is there for portfolio design (since conventional guidance based on analyses of past performance can’t really provide a logical basis)?
- Given that Siegel’s stocks-for-the-long-run canon is based on exclusively treasuries in the bond sleeve, does it make any sense to let this canon guide one’s portfolio allocation and then employ a total-bond-market approach in the bond sleeve?
- Given McQuarrie’s work, which suggests unpredictability in the incidence of 30-year periods when total bonds will outperform versus when total stocks will outperform, and given a 30-year peak investing period for perhaps many individuals, isn't a 50-50 stock-bond portfolio the sensible and logical approach to dealing with this uncertainty, especially for those who believe that past performance is no guarantee of future results?

Zweig ends: “Many investors have put blind faith in stocks, confident that history will repeat itself. Someday it might—in a way that investors who have all their money in stocks should hedge against before it’s too late.”
Last edited by cnh on Sat Nov 03, 2018 10:55 am, edited 1 time in total.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by JoMoney »

It looks to me like bonds did reasonably 'ok' even in Siegel's data for most of the 19th century.
The first half of the 1800's looks similar to stocks up until what I assume is the "Panic of 1857"
If you jump past that drop, and set the starting point on par with stocks it appears that it would have done well up until the start of the 20th century.
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One of the big changes in the 20th century, was the end of "Gold Clauses" being common in bonds requiring the payment be made in terms of hard money.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by AlohaJoe »

This seems like a nice new dataset and echos the point made by Arnott in "Bonds, Why Bother?"
From 1803 to 1857, stocks floundered, giving the equity investor one-third of the wealth of the bond holder; by 1871, that shortfall was finally recovered
That is, stocks underperformed bonds for 68 years.
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Re: Questioning the Dogma of "Stocks for the Long Run"

Post by PFInterest »

i think its good for the 100% stock people to realize just because you have 10% bonds doesnt mean your portfolio will never ever grow.
no, the past is the past, and who knows the future. but it does offer insight into possibilities that might occur again.
data picking is fun too. who did better from 1/2000 - 1/2010: 100% stocks, or 100% bonds.......its a fun time to get people to see that for a longer period than they thought, they could be screwed.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by nisiprius »

William J. Bernstein has also commented on this in his essay, only two centuries of data.
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Re: Questioning the Dogma of "Stocks for the Long Run"

Post by AlohaJoe »

cnh wrote: Sat Nov 03, 2018 9:18 am
- Stated more simply, if “past performance is no guarantee of future results” and if all—or at least most—guidance on portfolio design/allocation derives from analyses of past performance and if one is designing a portfolio to achieve some desired future results, then what logical basis is there for portfolio design (since conventional guidance based on analyses of past performance can’t really provide a logical basis)?
Past performance is no guarantee of future results doesn't mean "you can't learn anything from the past".

Why did stocks underperform during the period in question? Why did bonds outperform?
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by ChinchillaWhiplash »

A prime example of how well bonds can do. Plug VFINX and VBMFX into PV for total return. Start at year 2000 before dot com crash. 100% of each and 60/40 mix. See what happens. 100% TBM crushes total returns up to about 2017 then TSM takes over. See how the mix ends up. I'm going with a mix of equities and bonds and rebalancing. It makes the most sense. If you can market time, switching to mostly bonds during the top of an upswing in TSM, you would do pretty good. But who knows where the top is?
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by JoMoney »

Bonds were denominated in gold and paid interest in more gold.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by staythecourse »

So beating stocks 25% of the time is enough to say, "Bonds for the long run"?

Interesting it seems his evidence points MORE to believing in stocks for the long run. IF his data is correct (another issue is why does Dr. Seigel and him have very different data) then we can now indirectly quantify the most important question for an investor. That question is the, "Okay stocks have higher expected returns then bonds, but what is the chances it won't happen". Based on his research it is 25% of the time for the long term investor. Keep in mind the last instance it happened was just recent and the out performance of bonds was a whopping .3%.

So, if someone is going to tell me that the chance of holding stocks over bonds over 1/2 my investing lifespan is going to lead to a "failure rate" of 25% and IF that happens the magnitude of under performance is 0.3% that actually gives me MORE confidence then I had before investing in all stocks. That means 75% of the time stocks are outperforming and the magnitude of that outperformance is significant.

As Mr. Ferri wrote in "AAAA" investing is all about PROBABILITIES and not POSSIBILITIES. I'll take my higher equity allocation due to the high probability of success. Even if I am wrong I will likely underperform by a few base points. Since I am heavily in taxable the tax structure of stocks vs. bonds easily pushes it towards stocks as well.

This article it seems had the reverse effect on me.

Good luck.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by LadyGeek »

I merged cnh's thread into the on-going discussion.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by Broken Man 1999 »

Well, with a 50% Equities and a 50% Bond portfolio, I figure I'm covered no matter what. :D

You know, for a forum that stresses "past is not a predictor of the future", it does seem that many folks are not convinced.... just saying! :D

If the idea was fully supported, I suppose there wouldn't be much to discuss, so there is that.

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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by Tycoon »

staythecourse wrote: Sat Nov 03, 2018 9:39 am So beating stocks 25% of the time is enough to say, "Bonds for the long run"?

Interesting it seems his evidence points MORE to believing in stocks for the long run. IF his data is correct (another issue is why does Dr. Seigel and him have very different data) then we can now indirectly quantify the most important question for an investor. That question is the, "Okay stocks have higher expected returns then bonds, but what is the chances it won't happen". Based on his research it is 25% of the time for the long term investor. Keep in mind the last instance it happened was just recent and the out performance of bonds was a whopping .3%.

So, if someone is going to tell me that the chance of holding stocks over bonds over 1/2 my investing lifespan is going to lead to a "failure rate" of 25% and IF that happens the magnitude of under performance is 0.3% that actually gives me MORE confidence then I had before investing in all stocks. That means 75% of the time stocks are outperforming and the magnitude of that outperformance is significant.

As Mr. Ferri wrote in "AAAA" investing is all about PROBABILITIES and not POSSIBILITIES. I'll take my higher equity allocation due to the high probability of success. Even if I am wrong I will likely underperform by a few base points. Since I am heavily in taxable the tax structure of stocks vs. bonds easily pushes it towards stocks as well.

This article it seems had the reverse effect on me.

Good luck.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by JoMoney »

I wonder what Siegel used in his data for "U.S. Dollar" , since there wasn't a national currency until the National bank Act of 1863.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by columbia »

Broken Man 1999 wrote: Sat Nov 03, 2018 9:45 am Well, with a 50% Equities and a 50% Bond portfolio, I figure I'm covered no matter what. :D

You know, for a forum that stresses "past is not a predictor of the future", it does seem that many folks are not convinced.... just saying! :D

If the idea was fully supported, I suppose there wouldn't be much to discuss, so there is that.

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Re: Questioning the Dogma of "Stocks for the Long Run"

Post by Ron Scott »

AlohaJoe wrote: Sat Nov 03, 2018 9:37 am Past performance is no guarantee of future results doesn't mean "you can't learn anything from the past".
The question for most is not "can you learn from the past?". it is: Can you predict market returns in the future for a specific 30- or 40-year retirement period? The weighty concerns are specific, not general.

What most people really want to know is if they can rely statistical analyses of historical market return data to put a range around their expected market returns in retirement with enough confidence to bet their financial lives on. And the answer is no.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by Ron Scott »

Broken Man 1999 wrote: Sat Nov 03, 2018 9:45 am Well, with a 50% Equities and a 50% Bond portfolio, I figure I'm covered no matter what. :D
That is Bogle's portfolio too and he complains that half the time he thinks he's underweighted in stocks and half the time he thinks he's overweighted.
Broken Man 1999 wrote: Sat Nov 03, 2018 9:45 am You know, for a forum that stresses "past is not a predictor of the future", it does seem that many folks are not convinced.... just saying! :D
Predicting future market returns is too important to people for them to come to terms with the fact that they cannot. Some people become angry when you tell them their Firecalc and Monte Carlo sims don't work for the future. (How are we supposed to retire then? We might as well just end it all! The past contained the depression and world wars: how can that data not predict the future? Maybe we'll all die in a nuclear attack! etc.) Sad, but true.

Humans, and most animals, survive by being able to predict a lot about what will happen in the short-term in their lives. Anticipation and reaction... And they intuitively believe predictive ability extends to aspects of life it does not.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by gmaynardkrebs »

Even though TIPS haven't done too well lately, they may have fundamentally changed the landscape in favor of bonds. What has historically hurt bondholders so often, and in so many countries, is unexpected inflation. That accounts for bonds under performance compared to stocks over many long periods. (Over short, periods, less so, because equities don't do well initially under inflation; unlike bonds, however, they catch up eventually, as they represent real assets.) TIPS have "tipped" the playing field towards bonds quite a bit, I would think.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by tainted-meat »

This article only convinced me that stocks are better for the long run, assuming you don’t capitulate.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by tibbitts »

vineviz wrote: Sat Nov 03, 2018 9:25 am
Ron Scott wrote: Sat Nov 03, 2018 9:21 am
vineviz wrote: Sat Nov 03, 2018 9:14 am
History shows that a portfolio of bonds has outperformed stocks surprisingly often and for shockingly long periods.
It seems to me that if people would simply admit predicting future returns in the markets is a fools game and commit to a mix of 25% - 75% equities + bonds, indexed/low-cost/etc. they could ignore all the technobabble from "experts" who disagree with each other for a living.
It seems to me that if people focused more on learning and improving their knowledge rather than adding anti-intellectual comments in every thread designed to spark a serious discussion that there would be less babble period.
There are problems where additional learning or knowledge beyond a very basic level won't predictably improve the end result, and choosing an asset allocation is one of those problems.
Last edited by tibbitts on Sat Nov 03, 2018 10:21 am, edited 1 time in total.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by tibbitts »

tainted-meat wrote: Sat Nov 03, 2018 10:15 am This article only convinced me that stocks are better for the long run, assuming you don’t capitulate.
Depending on your definition of "long run", you can perhaps say "have been better", not necessarily "are better." And the "long run" in terms of your lifetime might not be long enough to realize that result. Even if you don't capitulate, you might need to withdraw your investments for any number of reasons. Life isn't that predictable.
Last edited by tibbitts on Sat Nov 03, 2018 10:23 am, edited 1 time in total.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by randomguy »

AlohaJoe wrote: Sat Nov 03, 2018 9:32 am This seems like a nice new dataset and echos the point made by Arnott in "Bonds, Why Bother?"
From 1803 to 1857, stocks floundered, giving the equity investor one-third of the wealth of the bond holder; by 1871, that shortfall was finally recovered
That is, stocks underperformed bonds for 68 years.
Compare the amount of underperformance. I could live with either the stock or bond performance of 1830-1900. 3 or 4% real is ok. Living on the negative real return of bonds on the other hand would be rough.

A couple comments
a) Long bonds. Are they the bonds your buying?
b) how accurate is any of the pre 1900 data? Do we have any clue if the index used by either of them is remotely accurate or are there some biases creeping int
c) if the data is accurate, does it worry you that almost all of the outperformance came in one chunk 175 years ago? Does a long period like that imply a structural change in the markets.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by gmaynardkrebs »

randomguy wrote: Sat Nov 03, 2018 10:23 am...
c) if the data is accurate, does it worry you that almost all of the outperformance came in one chunk 175 years ago? ...
No. What worries me is that the last one was in 2011, which is like yesterday to me. Glad I was "underweight" stocks then, and happy to stay that way today.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by nisiprius »

staythecourse wrote: Sat Nov 03, 2018 9:39 am...another issue is why does Dr. Siegel and him have very different data...
Possibly because all the data from the 1800s is dubious, particularly data on dividends. Dr. Siegel used guesstimates for dividends. Furthermore, he changed the guesstimate over the years, originally using 5% and raising it to 6.2% later on.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by gmaynardkrebs »

JoMoney wrote: Sat Nov 03, 2018 9:38 am Bonds were denominated in gold and paid interest in more gold.
This seems quite significant, as it wipes out some (but not all) of the inflationary-harm to bonds. I say "not all," as I believe that the huge new gold strikes of the mid 1800s (Klondike, Sutters) were inflationary. However, not as inflationary as fiat money, I would think. It certainly helps to explain the relatively better performance of bonds in the 19th century.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by Ben Mathew »

I think comparing the raw historical returns of stocks vs bonds, while interesting, leaves out a critical piece of information--yields at the time.

Suppose that at some point in the past, bonds were paying out 7% (real) interest rates and stocks had earnings yields of 2%. Having bonds outperform stocks in such a scenario would not be a very useful guide when you are in an environment where the yields are reversed and bonds are paying out 2% and earnings yields of stocks is 7%. It seems to me that an informed guess about future performance of stocks and bonds would condition on current yields.

My estimate for future performance has been current yields rather than historical performance of the asset class. It would be interesting to see how well this estimate has done historically as a guide to future returns.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by randomguy »

gmaynardkrebs wrote: Sat Nov 03, 2018 10:31 am
randomguy wrote: Sat Nov 03, 2018 10:23 am...
c) if the data is accurate, does it worry you that almost all of the outperformance came in one chunk 175 years ago? ...
No. What worries me is that the last one was in 2011, which is like yesterday to me. Glad I was "underweight" stocks then, and happy to stay that way today.
I would rather be happy for 99 years and unhappy for 1😁

buying bonds for stability is one thing. Buying long bonds and hoping to outperform stocks is another. Note how they never talk about total bknd outperforming stocks over 30 year periods
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by packer16 »

One thing to remember that that in the 19th century, the USA was an emerging market. In EMs, bonds do not provide investors as much protection against downfalls as in developed markets. I do not interpret this as bonds will do as well as stocks in developed markets but bonds in EMs have risks closer to stocks. Look at the muni bond failures in the 19th century versus the 20th century as an example. An interesting comparison would be stocks & bonds in the UK in the 19th century as the UK was a developed market in the 19th century versus the US which was an EM.

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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by gmaynardkrebs »

randomguy wrote: Sat Nov 03, 2018 11:37 am...
buying bonds for stability is one thing. Buying long bonds and hoping to outperform stocks is another. Note how they never talk about total bknd outperforming stocks over 30 year periods
If by "They" you mean CNBC, brokerage agents, mutual funds etc, "they" never spoke about bonds outperforming stocks when it was actually happening, from 1981 to 2011, and never will. Why? Because they can't make nearly as much money selling bonds, nor be able to support the huge (and useless) sell side "research" bureaucracies, huge salaries for star mutual fund managers, and ad spending in WSJ and on CNBC. I don't know if the 1981 through 2011 history will ever repeat itself, but if if it does, I can guarantee that the one place you will never hear about it from is the aforementioned "They."
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by stlutz »

For the purposes of a forward looking discussion:

So, the iShares Long-Term Corporate bond ETF currently yields just under 5% with a duration of 13. Subtract .25% per year for credit losses and then another 2% for inflation and you have a relatively lower risk investment offering a 2.75% real rate of return.

The primary risk here is known ahead of time (high inflation), but why wouldn't this form a good core of a portfolio for a person entering retirement? Is it really worse than a mix of stocks and short-term treasuries or CDs that are basically matching inflation?
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by Kenkat »

JoMoney wrote: Sat Nov 03, 2018 9:47 am I wonder what Siegel used in his data for "U.S. Dollar" , since there wasn't a national currency until the National bank Act of 1863.
There were still gold and silver coins denominated in dollars or fractions of a dollar.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by BlueEars »

Why focus on ancient returns data? The developed world has changed too much. There was slavery in the 1800's and financial markets were very very different. I prefer just looking at post WW2 data which is confusing enough.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by randomguy »

gmaynardkrebs wrote: Sat Nov 03, 2018 12:13 pm
randomguy wrote: Sat Nov 03, 2018 11:37 am...
buying bonds for stability is one thing. Buying long bonds and hoping to outperform stocks is another. Note how they never talk about total bknd outperforming stocks over 30 year periods
If by "They" you mean CNBC, brokerage agents, mutual funds etc, "they" never spoke about bonds outperforming stocks when it was actually happening, from 1981 to 2011, and never will. Why? Because they can't make nearly as much money selling bonds, nor be able to support the huge (and useless) sell side "research" bureaucracies, huge salaries for star mutual fund managers, and ad spending in WSJ and on CNBC. I don't know if the 1981 through 2011 history will ever repeat itself, but if if it does, I can guarantee that the one place you will never hear about it from is the aforementioned "They."
I have a simplier answer that doesnt require conspiracy theories. There was no outperformance to talk about. Long bonds underperformed stocks for pretty much the whole time period except for the brief blip at the end.

And you missed the point. Total bond never out performs. Why not compare long to the top performing stock subsegment? Cause seeing you have half as much money isnt much of a story.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by lgs88 »

The more I read about markets, the more I’m convinced that it’s a poor use of my time. I own some stocks; I own some high-quality bonds. 20 years from now, it will be clear that I should have owned more of some and less of the other.

But for my money, I suspect it’s a better use of my time to just take a walk and let it ride rather than trying to read the tea leaves of these academic researchers.
merely an interested amateur
bondsr4me
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by bondsr4me »

tainted-meat wrote: Sat Nov 03, 2018 10:15 am This article only convinced me that stocks are better for the long run, assuming you don’t capitulate.
and therein lies the real problem...."assuming you don't capitulate".

lately, I've seen more posts than usual about "staying the course" as stocks have been getting roughed up lately.

It's seems pretty easy to "stay the course" when stocks are marching upward;
not so easy during periods of prolonged declines.
Declines can require some real soul searching.
If market "corrections" cause worry or panic or loss of sleep, then it's time do an honest assessment of asset allocation.

What's good for one person, may be sour medicine to another.

Have a great weekend.
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Phineas J. Whoopee
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by Phineas J. Whoopee »

Kenkat wrote: Sat Nov 03, 2018 12:30 pm
JoMoney wrote: Sat Nov 03, 2018 9:47 am I wonder what Siegel used in his data for "U.S. Dollar" , since there wasn't a national currency until the National bank Act of 1863.
There were still gold and silver coins denominated in dollars or fractions of a dollar.
The Coinage Act of 1792 established the US Dollar. Foreign coins, especially the Spanish Milled Dollar, also called a Piece of Eight (because it was worth eight Spanish Reals) continued to circulate for decades. It echoed until fairly recently in the custom of pricing stocks in eighths of dollars.

PJW
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by bgf »

i see one asset that never returned less than 2.5% real and another asset the often returned less than 2.5% real and for a good chunk had negative real returns.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
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gmaynardkrebs
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by gmaynardkrebs »

randomguy wrote: Sat Nov 03, 2018 12:43 pm
gmaynardkrebs wrote: Sat Nov 03, 2018 12:13 pm
randomguy wrote: Sat Nov 03, 2018 11:37 am...
buying bonds for stability is one thing. Buying long bonds and hoping to outperform stocks is another. Note how they never talk about total bknd outperforming stocks over 30 year periods
If by "They" you mean CNBC, brokerage agents, mutual funds etc, "they" never spoke about bonds outperforming stocks when it was actually happening, from 1981 to 2011, and never will. Why? Because they can't make nearly as much money selling bonds, nor be able to support the huge (and useless) sell side "research" bureaucracies, huge salaries for star mutual fund managers, and ad spending in WSJ and on CNBC. I don't know if the 1981 through 2011 history will ever repeat itself, but if if it does, I can guarantee that the one place you will never hear about it from is the aforementioned "They."
I have a simplier answer that doesnt require conspiracy theories. There was no outperformance to talk about. Long bonds underperformed stocks for pretty much the whole time period except for the brief blip at the end.

And you missed the point. Total bond never out performs. Why not compare long to the top performing stock subsegment? Cause seeing you have half as much money isnt much of a story.
Not sure I get your point about Total Bond-- are you saying it performs worse than other bond funds. FWIW, virtually all of my long bond holdings are in TIPS, so I don't follow Total Bond very much.
Just to be clear, I don't think it's a conspiracy theory, it's an agency problem (ie, your agent is the agent for the agent.)
yousha
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Bonds for the long term.

Post by yousha »

An excellent article in today's WSJ...Nov, 3, 2018. It states that Bonds have done better in the long term that Stocks. Wow!

[merged this post and its replies into the existing topic - moderator prudent]
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Re: Bonds for the long term.

Post by vineviz »

yousha wrote: Sat Nov 03, 2018 8:29 pm An excellent article in today's WSJ...Nov, 3, 2018. It states that Bonds have done better in the long term that Stocks. Wow!
That's not PRECISELY the conclusion: bonds have done better than stocks in SOME time periods, mostly between 1793 and 1905.

More discussion in this thread: viewtopic.php?f=10&t=263020
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
ignition
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by ignition »

Ben Mathew wrote: Sat Nov 03, 2018 11:34 am I think comparing the raw historical returns of stocks vs bonds, while interesting, leaves out a critical piece of information--yields at the time.

Suppose that at some point in the past, bonds were paying out 7% (real) interest rates and stocks had earnings yields of 2%. Having bonds outperform stocks in such a scenario would not be a very useful guide when you are in an environment where the yields are reversed and bonds are paying out 2% and earnings yields of stocks is 7%. It seems to me that an informed guess about future performance of stocks and bonds would condition on current yields.

My estimate for future performance has been current yields rather than historical performance of the asset class. It would be interesting to see how well this estimate has done historically as a guide to future returns.
Agreed. It's unlikely that bonds will outperform stocks over 30 years at current yields/valuations.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by aristotelian »

ignition wrote: Sun Nov 04, 2018 3:35 am
Ben Mathew wrote: Sat Nov 03, 2018 11:34 am I think comparing the raw historical returns of stocks vs bonds, while interesting, leaves out a critical piece of information--yields at the time.

Suppose that at some point in the past, bonds were paying out 7% (real) interest rates and stocks had earnings yields of 2%. Having bonds outperform stocks in such a scenario would not be a very useful guide when you are in an environment where the yields are reversed and bonds are paying out 2% and earnings yields of stocks is 7%. It seems to me that an informed guess about future performance of stocks and bonds would condition on current yields.

My estimate for future performance has been current yields rather than historical performance of the asset class. It would be interesting to see how well this estimate has done historically as a guide to future returns.
Agreed. It's unlikely that bonds will outperform stocks over 30 years at current yields/valuations.
It's statements like these that make me nervous. Stocks are at high valuations too. And in an efficient market, no asset class should persistently over perform with the same level of risk. If stocks and long bonds have roughly the same volatility, the long term returns should even out.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by randomguy »

gmaynardkrebs wrote: Sat Nov 03, 2018 1:07 pm
randomguy wrote: Sat Nov 03, 2018 12:43 pm
gmaynardkrebs wrote: Sat Nov 03, 2018 12:13 pm
randomguy wrote: Sat Nov 03, 2018 11:37 am...
buying bonds for stability is one thing. Buying long bonds and hoping to outperform stocks is another. Note how they never talk about total bknd outperforming stocks over 30 year periods
If by "They" you mean CNBC, brokerage agents, mutual funds etc, "they" never spoke about bonds outperforming stocks when it was actually happening, from 1981 to 2011, and never will. Why? Because they can't make nearly as much money selling bonds, nor be able to support the huge (and useless) sell side "research" bureaucracies, huge salaries for star mutual fund managers, and ad spending in WSJ and on CNBC. I don't know if the 1981 through 2011 history will ever repeat itself, but if if it does, I can guarantee that the one place you will never hear about it from is the aforementioned "They."
I have a simplier answer that doesnt require conspiracy theories. There was no outperformance to talk about. Long bonds underperformed stocks for pretty much the whole time period except for the brief blip at the end.

And you missed the point. Total bond never out performs. Why not compare long to the top performing stock subsegment? Cause seeing you have half as much money isnt much of a story.
Not sure I get your point about Total Bond-- are you saying it performs worse than other bond funds. FWIW, virtually all of my long bond holdings are in TIPS, so I don't follow Total Bond very much.
Just to be clear, I don't think it's a conspiracy theory, it's an agency problem (ie, your agent is the agent for the agent.)
Yes total bond performs worse than other bond funds. That is expected.

Again when should have CNBC been talking about long bond outperformance? In 1985 when long bonds were underperforming stocks over the past 30 years, 1990 when long bonds were underperforming stocks, 2000 when long bonds were underperforming stocks? 2005? Of course not. There was nothing to talk about. It wasn't until 2009 when we had that brief moment when bonds outperformed and when it happened everyone reported it. It is about what you would expect. It isn't an agency issue. There was just nothing to report. And if you had a time machine, you wouldn't be buying long bonds in 1981. You would be buying small value. After all it gave you 2x as much money as long bonds over 30 years.

Of course I do remember people telling me in the 90s how long bonds were a poor investment. They were only paying like 6% which was like 20 year lows and inflation was about to come back any day now:) Of course those same people said Apple was a going bankrupt:)
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by gmaynardkrebs »

aristotelian wrote: Sun Nov 04, 2018 6:51 am
ignition wrote: Sun Nov 04, 2018 3:35 am
Ben Mathew wrote: Sat Nov 03, 2018 11:34 am I think comparing the raw historical returns of stocks vs bonds, while interesting, leaves out a critical piece of information--yields at the time.

Suppose that at some point in the past, bonds were paying out 7% (real) interest rates and stocks had earnings yields of 2%. Having bonds outperform stocks in such a scenario would not be a very useful guide when you are in an environment where the yields are reversed and bonds are paying out 2% and earnings yields of stocks is 7%. It seems to me that an informed guess about future performance of stocks and bonds would condition on current yields.

My estimate for future performance has been current yields rather than historical performance of the asset class. It would be interesting to see how well this estimate has done historically as a guide to future returns.
Agreed. It's unlikely that bonds will outperform stocks over 30 years at current yields/valuations.
It's statements like these that make me nervous. Stocks are at high valuations too. And in an efficient market, no asset class should persistently over perform with the same level of risk. If stocks and long bonds have roughly the same volatility, the long term returns should even out.
However, in fact, that has not been the case. This is referred to as the excess equity premium puzzle. Economist Brad Delong has an excellent article attempting to explain it. He concludes that even though what you say should be true, investors perceive stocks as riskier than they are. However, he also points out that for individuals, who do not have infinite time horizons, this may be a rational response to crashes, which seem to occur with some regularity, and often at the wrong time for some investors (ie, those near retirement.) He also does a good job of explaining the other attempts to explain it. Lastly, he concludes that the excess premium has been shrinking over time, as investors recognize that stocks do tend to recover after crashes. None of this is hot news to this forum, but the article is well done.

https://www.aeaweb.org/articles/pdf/doi ... p.23.1.193
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by indexonlyplease »

Broken Man 1999 wrote: Sat Nov 03, 2018 9:45 am Well, with a 50% Equities and a 50% Bond portfolio, I figure I'm covered no matter what. :D

You know, for a forum that stresses "past is not a predictor of the future", it does seem that many folks are not convinced.... just saying! :D

If the idea was fully supported, I suppose there wouldn't be much to discuss, so there is that.

Broken Man 1999
Good point. We always talk about diversity. So in the long run we don't know what will do better? So, the 50/50 AA maybe is better then the 60/40 everyone talks about.
I like 50/50 it easy to figure out. But then what do I know, I was 100% stock funds 3 years ago.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by ignition »

aristotelian wrote: Sun Nov 04, 2018 6:51 am
ignition wrote: Sun Nov 04, 2018 3:35 am
Ben Mathew wrote: Sat Nov 03, 2018 11:34 am I think comparing the raw historical returns of stocks vs bonds, while interesting, leaves out a critical piece of information--yields at the time.

Suppose that at some point in the past, bonds were paying out 7% (real) interest rates and stocks had earnings yields of 2%. Having bonds outperform stocks in such a scenario would not be a very useful guide when you are in an environment where the yields are reversed and bonds are paying out 2% and earnings yields of stocks is 7%. It seems to me that an informed guess about future performance of stocks and bonds would condition on current yields.

My estimate for future performance has been current yields rather than historical performance of the asset class. It would be interesting to see how well this estimate has done historically as a guide to future returns.
Agreed. It's unlikely that bonds will outperform stocks over 30 years at current yields/valuations.
It's statements like these that make me nervous. Stocks are at high valuations too. And in an efficient market, no asset class should persistently over perform with the same level of risk. If stocks and long bonds have roughly the same volatility, the long term returns should even out.
It's no coincidence that the only time that long bonds outperformed over the last 100 years was 1981-2011. The starting yield was over 10% in 1981. Starting yield matters when it comes to bond returns.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by gmaynardkrebs »

ignition wrote: Sun Nov 04, 2018 7:51 am Starting yield matters when it comes to bond returns.
It matters with everything. Equities too.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by ignition »

gmaynardkrebs wrote: Sun Nov 04, 2018 9:09 am
ignition wrote: Sun Nov 04, 2018 7:51 am Starting yield matters when it comes to bond returns.
It matters with everything. Equities too.
Sure, but I don't think equities are that overvalued. Especially if you look at a globally diversified portfolio and take into account current interest rates.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by gmaynardkrebs »

ignition wrote: Sun Nov 04, 2018 9:26 am
gmaynardkrebs wrote: Sun Nov 04, 2018 9:09 am
ignition wrote: Sun Nov 04, 2018 7:51 am Starting yield matters when it comes to bond returns.
It matters with everything. Equities too.
Sure, but I don't think equities are that overvalued. Especially if you look at a globally diversified portfolio and take into account current interest rates.
Not so sure I'm totally with you on that. To these 68 year old eyes, equities look quite overvalued. But, admittedly a lot of that is mental accounting. Everything was cheaper when I started, which makes everything look high today. I just can't get around to calling equities "not overvalued" at today's levels.
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Re: WSJ: Sometimes, It’s Bonds For the Long Run

Post by randomguy »

indexonlyplease wrote: Sun Nov 04, 2018 7:26 am
Broken Man 1999 wrote: Sat Nov 03, 2018 9:45 am Well, with a 50% Equities and a 50% Bond portfolio, I figure I'm covered no matter what. :D

You know, for a forum that stresses "past is not a predictor of the future", it does seem that many folks are not convinced.... just saying! :D

If the idea was fully supported, I suppose there wouldn't be much to discuss, so there is that.

Broken Man 1999
Good point. We always talk about diversity. So in the long run we don't know what will do better? So, the 50/50 AA maybe is better then the 60/40 everyone talks about.
I like 50/50 it easy to figure out. But then what do I know, I was 100% stock funds 3 years ago.
It isn't about the past predicting the future. It is about fundamental assumptions (more risk leads to more reward). Every now and then (i.e. the 1 time in the last 100 years that we are talking about), the risk shows up and the safer investment has higher returns.

And I haven't heard anyone on this forum recommend any portfolio with 40-50% long bonds. Most people push intermediate term (i.e. about what total bond offers). Look at the iShares 20+ year treasuries to see what the volatility of holding them is like. In our pretty stable rate world, they have had years of +30 and -20% over the past decade. That isn't as volatile as stocks have been but it is a lot more than what most of us think of when someone says bonds.

The closest I can think of is the permanent portfolio where some versions are like 25% cash, gold, long bonds, and stocks.
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