Has this happened before? [Equities and bonds both down]

[burt]

Has this happened before?

Vanguard Total Stock Index -24% YTD
Vanguard Total Bond Index - 11.5% YTD
Vanguard Target Retirement Income Fund (30/70) -13% YTD
Inflation 8%

Thought I was conservative with a 30/70 portfolio.
Sure doesn't feel like it.

burt

[tibbitts]

I don't view "ever" as being very significant regarding investment performance, because "ever" is such a tiny slice of time. And whenever anybody discusses Japan, or the depression in the U.S., they always discount that by saying it almost surely can't happen again due to various structural changes. So you have to start by defining how long you consider "ever", preferably for some reason other than "I can't get data back farther than that."

[Robert20]

Has this happened before?

Vanguard Total Stock Index -24% YTD
Vanguard Total Bond Index - 11.5% YTD
Vanguard Target Retirement Income Fund (30/70) -13% YTD
Inflation 8%

Thought I was conservative with a 30/70 portfolio.
Sure doesn't feel like it.

burt

Add crypto -60% down YTD

[Misenplace]

This topic is now in the Investing- Theory, News and General forum.

Please note also that discussions of crypto as an investment are off topic for the forum.

Moderator Misenplace

[PicassoSparks]

Yes it has happened before, many times.

Bonds are only mildly correlated with stocks. Sometimes they are negatively correlated, but often they have been positively correlated.

This chart shows a history of Treasury to stock market correlations.

from AQR https://www.aqr.com/Insights/Research/A ... orrelation

I seem to remember learning that when you include commercial bonds, there is higher correlation since when a company's value starts crashing its equity and its debt obligations are put at risk.

[delamer]

It happened during the Great Recession.

[nedsaid]

The 1970's were a tough environment for both Stocks and Bonds. A little thing called Stagflation.

[nisiprius]

Not anywhere near as much, but:

Source



Notice that over that entire time period, Total Bond had a [stock] market correlation of +0.76.

Yes, it's unusual. Yes, it sucks. But it certainly has happened before.

[yules]

Has this happened before?

Vanguard Total Stock Index -24% YTD
Vanguard Total Bond Index - 11.5% YTD
Vanguard Target Retirement Income Fund (30/70) -13% YTD
Inflation 8%

Thought I was conservative with a 30/70 portfolio.
Sure doesn't feel like it.

burt

It depends on how old you are, it might have happened in your lifetime!

Yules

[tertre]

On the correlation topic (last Credit Suisse Global Investment Returns Yearbook) :

Baele and Van Holle (2017) conclude that pure macro regimes explain relatively little of the variation in stock-bond correlations.
They conclude that stock-bond correlations tend to be strongly negative when monetary policy is accommodating, but only in times of low inflation. Irrespective of the inflation or output regime, stock-bond correlations turn positive as soon as monetary policy turns restrictive. (...)
Despite the volume of research, neither theory nor empirical studies point to a single or clear explanation for the negative stock-bond correlation.
(...) Historically, the long-run stock-bond correlation across countries from 1900 to 2021 has been +0.32. Based on a reading of the empirical evidence and the tea leaves of history, we would not recommend placing reliance on a continuation of negative stock-bond correlations.

https://www.credit-suisse.com/media/ass ... dition.pdf p.31

[nisiprius]

Over 1152 one-month periods, from 1/1926 through 12/2021, where "stocks" means "the SBBI large stocks data series" (S&P 500 and predecessor) and "bonds" means "the SBBI long-term government bonds series:"

There were 186 months when stocks and bonds both went down.
There were 468 months when stocks and bonds both went up.
There were 654 months when stocks and bonds moved in the same direction.
There were 498 months when stocks and bonds moved in opposite directions.

[arcticpineapplecorp.]

Has this happened before?

Vanguard Total Stock Index -24% YTD
Vanguard Total Bond Index - 11.5% YTD
Vanguard Target Retirement Income Fund (30/70) -13% YTD
Inflation 8%

Thought I was conservative with a 30/70 portfolio.
Sure doesn't feel like it.

burt

I think you're asking two questions:
1. have stocks and bonds both fallen before? That has been answered by others already so I'll leave that except to say that bonds are still safe(r) than stocks since they lost half as much. People don't seem to be thinking that way because they're too busy thinking bonds are either NOT supposed to lose money (at all) or they're SUPPOSED to go up when stocks fall. Neither is the case.

2. if I'm in a conservative portfolio how come I lost 13% of my money??

I'll focus on #2.

While the bonds aren't helping your conservative portfolio at present, you have to also remember that stocks can lose 50% of their value (and have a few times before). And when that happened last in 2007-2009 take a look at how much a conservative portfolio (30/70) fared at that time:



yep, -13%.

I'm not suggesting there's some kind of universal law for a conservative portfolio to lose 13%. It can always lose more (or less) than that.

But the point is even if you expect bonds to stay flat most of the time that still means your portfolio can lose 15% if stocks fall by 50% because you're looking at a 50% loss on 30% of your money. .30 X .50 = .15 or 15% loss.

You can rightly intuit that 2007-2009 the reason the 30/70 only lost -13.41% and not 15% when stocks fell 50.80% is because bonds obviously rose somewhat which reduced the losses on the stock side of the portfolio. It obviously doesn't have to be that way.

Don't know if that helps, other than to say you should still expect losses as much as 15%-20% (or so) from your conservative portfolio.

In fact if stocks had fallen 50% now and the bonds were down 11% you'd be looking at 22% losses on your conservative portfolio:

(-.50 X .30) + (-11 X .70)
-15% + -7.7%
-22.7% loss overall

But finally remember that the year isn't over yet.

Stocks can rebound (or fall further ). The total stock market rebounded in 2020 after falling 32% (34% for S&P 500 below) between Feb-March (that's more than they've fallen this year) only to end UP +20% (16% for the S&P500 below) for the year (2020). Not saying that's going to happen this year, but you just never know.

Similarly, while bonds are down -11% so far, the year's not over yet. There are six months more of higher interest payments than you received the last several years when interest rates were much much lower than they are now.

There are always intrayear losses (for stocks). See the chart below. But even though there were intrayear declines over the past 42 years, the market ended positively (Jan-Dec) 32 of those 42 years (75% of the time):



source: https://am.jpmorgan.com/us/en/asset-man ... e-markets/

Don't focus on a 6 month performance of your portfolio. It's meaningless. Surely you've experienced such declines over your investing history (I'm assuming you're in retirement if you have a conservative portfolio, though I know that may be untrue and you may simply be risk averse.)

[Goldilocks]

If main purpose of having bonds in the portfolio is to use them for re-balancing, why hold Core Bonds funds like the Vanguard Total Bond Index at all? They have had had negative returns over the past two years, trailed inflation miserably and their share prices have plummeted 11% at this critical time when they are needed to re-balance with during this bear stock market - how disappointing .

In hind sight, one would have been better off holding cash for the past few years in a settlement account than having these un-reliable bond funds. Is there any Boglehead wisdom on using cash, short term treasury funds or something "safer" from market and interest rate risks in lieu of bond funds?

[rkhusky]

If main purpose of having bonds in the portfolio is to use them for re-balancing, why hold Core Bonds funds like the Vanguard Total Bond Index at all? They have had had negative returns over the past two years, trailed inflation miserably and their share prices have plummeted 11% at this critical time when they are needed to re-balance with during this bear stock market - how disappointing .

In hind sight, one would have been better off holding cash for the past few years in a settlement account than having these un-reliable bond funds. Is there any Boglehead wisdom on using cash, short term treasury funds or something "safer" from market and interest rate risks in lieu of bond funds?

I wouldn't base my long term investing strategy on just the last 2 years. I also wouldn't try to time the bond market by trying to hold Total Bond when bonds are doing well and switching to cash when it appears that bonds will do poorly.

And bonds are only doing poorly if you look at the NAV and short term returns. If you are looking long term, then rising bond interest rates are a good thing.

You can hold cash or short bonds instead of a Total Bond fund, but you you will have lower returns long term. The duration of your bonds should be matched to when you need to sell them.

[UpperNwGuy]

If main purpose of having bonds in the portfolio is to use them for re-balancing

Rebalancing is not the main reason why I hold bonds in my portfolio.

[delamer]

If main purpose of having bonds in the portfolio is to use them for re-balancing, why hold Core Bonds funds like the Vanguard Total Bond Index at all? They have had had negative returns over the past two years, trailed inflation miserably and their share prices have plummeted 11% at this critical time when they are needed to re-balance with during this bear stock market - how disappointing .

In hind sight, one would have been better off holding cash for the past few years in a settlement account than having these un-reliable bond funds. Is there any Boglehead wisdom on using cash, short term treasury funds or something "safer" from market and interest rate risks in lieu of bond funds?

I wouldn't base my long term investing strategy on just the last 2 years. I also wouldn't try to time the bond market by trying to hold Total Bond when bonds are doing well and switching to cash when it appears that bonds will do poorly.

And bonds are only doing poorly if you look at the NAV and short term returns. If you are looking long term, then rising bond interest rates are a good thing.

You can hold cash or short bonds instead of a Total Bond fund, but you you will have lower returns long term. The duration of your bonds should be matched to when you need to sell them.

I agree with the above regarding long-term strategy.

However, there is a school of thought that it makes sense to hold cash equivalents for fixed income and a relatively larger share of stocks.

So instead of 60/40 in stock/bonds, you’d hold 70/30 in stocks/cash equivalents.

With the low returns on cash over the last several years, this option hasn’t had a lot of fans.

But it is what I do. Again, though, it needs to be a long-term philosophy, not something that you jump in and out of as yields change.

[Goldilocks]

You can hold cash or short bonds instead of a Total Bond fund, but you you will have lower returns long term. The duration of your bonds should be matched to when you need to sell them.

Yes, and there is the challenge of any Bond fund in a classic 3 fund portfolio--bond fund shares falling when when we need sell to re-balance. Because we can't time the market--knowing the duration and portion of the bond fund that will need to be sold ahead of time for re-balancing is impossible to predict. Some accept falling bond fund share prices because the long term the dividend payouts will increase. But this doesn't work in the short term when we need to re-balance between stocks and bonds

I can see the benefits of substituting a portion of the bond funds with cash. I've also have heard of investors buying annuity contracts from insurance corporations in lieu of holding cash or bonds in a portfolio. I am not a fan of annuities but don't like bond funds either. Maybe an annuity would be a better solution and worth the trouble to avoid the harmful losses in the bond fund shares when they need to be sold in years like this.

Bonds are the most complex and difficult part of investing. These funds are not dependable assets for re-balancing and don't pay well for all their risk which today on a total bond is barely over 3% long term. A year like this year of 11%+ losses makes them hardly worth owning for the past several years. If anyone has a link to deal with this problem and found better re balancing assets, please share.

[delamer]

You can hold cash or short bonds instead of a Total Bond fund, but you you will have lower returns long term. The duration of your bonds should be matched to when you need to sell them.

Yes, and there is the challenge of any Bond fund in a classic 3 fund portfolio--bond fund shares falling when when we need sell to re-balance. Because we can't time the market--knowing the duration and portion of the bond fund that will need to be sold ahead of time for re-balancing is impossible to predict. Some accept falling bond fund share prices because the long term the dividend payouts will increase. But this doesn't work in the short term when we need to re-balance between stocks and bonds

I can see the benefits of substituting a portion of the bond funds with cash. I've also have heard of investors buying annuity contracts from insurance corporations in lieu of holding cash or bonds in a portfolio. I am not a fan of annuities but don't like bond funds either. Maybe an annuity would be a better solution and worth the trouble to avoid the harmful losses in the bond fund shares when they need to be sold in years like this.

Bonds are the most complex and difficult part of investing. These funds are not dependable assets for re-balancing and don't pay well for all their risk which today on a total bond is barely over 3% long term. A year like this year of 11%+ losses makes them hardly worth owning for the past several years. If anyone has a link to deal with this problem and found better re balancing assets, please share.

Just wanted to point out that the above is not my quote. It’s rkhusky’s.

[Northern Flicker]

Has this happened before?

Vanguard Total Stock Index -24% YTD
Vanguard Total Bond Index - 11.5% YTD
Vanguard Target Retirement Income Fund (30/70) -13% YTD
Inflation 8%

Thought I was conservative with a 30/70 portfolio.
Sure doesn't feel like it.

burt

Bear market of 1973/1974, except stocks cratered at -48% from the pre-bear peak.

[Morgenstern]

For those who follow the work of Paul Merriman's Educational Foundation, when I look at the "Fine Tuning Your Asset Allocation" table from 1970 through 2021, I see that the returns of the S&P 500 in 1973 and 1974 were -14.7% and -26.5%, respectively. A combination of short-term Treasuries and intermediate government bonds would have returned +6.0% and +7.0% in 1973 and 1974, respectively. The bond group (now also including TIPS) was also up appreciably during the bear markets of 2000-2002 and 2008-2009. That is not what I see happening now. If the 2022 trend continues for most of the rest of the year, I see no precedent in the Merriman data going back to 1970.

https://paulmerriman.com/wp-content/upl ... 022-B1.pdf

[Valuethinker]

For those who follow the work of Paul Merriman's Educational Foundation, when I look at the "Fine Tuning Your Asset Allocation" table from 1970 through 2021, I see that the returns of the S&P 500 in 1973 and 1974 were -14.7% and -26.5%, respectively. A combination of short-term Treasuries and intermediate government bonds would have returned +6.0% and +7.0% in 1973 and 1974, respectively. The bond group (now also including TIPS) was also up appreciably during the bear markets of 2000-2002 and 2008-2009. That is not what I see happening now. If the 2022 trend continues for most of the rest of the year, I see no precedent in the Merriman data going back to 1970.

https://paulmerriman.com/wp-content/upl ... 022-B1.pdf

Because of the high inflation in the 1970s it is difficult to interpret return numbers.

If inflation was 9% then yields on US Treasury bonds were probably c 7-8%. So you would have gotten that kind of total return on Treasury Bonds.

It's better to use real returns.

We are in a time period we have not been in since the mid 1970s, when interest rates & bond yields are way below inflation.