Stagflation Causing Negative Bonds/Stocks

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Odie
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Joined: Sat Oct 06, 2018 2:14 pm

Stagflation Causing Negative Bonds/Stocks

Post by Odie »

I'm retired and a three fund Vanguard investor-Bond VBTLX, Stock VINIX, Balanced VBIAX. Asset Allocation is 60% Bonds and 40% Stocks. Since my retirement in 2018 over all returns has been 26.6% so I'm feeling pretty good. However, the US is now experiencing stagflation similar to the 70s and early 80s. Stagflation is causing both Bonds and Stocks to go negative at the same time which usually does not happen. Stagflation started effecting the markets around November 2021 and is carry through in 2022.

YTD-VBTLX -2.34%, VINIX -3.92 VBIAX -4.28%.

Questions. How long will stagflation last? It lasted almost 10 years in the 70s and early 80s. What can be done with the AA to get even a modest return during this period? Add TIPS and precious metals? Or add money market funds when interest rates go up in 2022?
Broken Man 1999
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Re: Stagflation Causing Negative Bonds/Stocks

Post by Broken Man 1999 »

Do you believe we are experiencing stagflation as defined below?

stagflation
[ˌstaɡˈflāSH(ə)n]
NOUN
economics
persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

I don't see the same thing as you. Of course, my opinion is mine, might be wrong, might be right.

One thing certainly is true: We have not yet experienced persistent high inflation, though we
might.

Your call might be premature, IMHO.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
sycamore
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Re: Stagflation Causing Negative Bonds/Stocks

Post by sycamore »

I don't see what's happening now as stagflation.

Certain conditions now are different than in the 70's. More plentiful and lower-cost energy resources for one thing, and a global pandemic for another.

There are multiple factors affecting the economy. I'd be skeptical about chalking it all up to one factor in any case.
rich126
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Re: Stagflation Causing Negative Bonds/Stocks

Post by rich126 »

I don't believe this is stagflation. Indexing is not going to help when things are going bad. You'd have to be good enough to pick strong, good valued individual stocks which people here believe you can't do. Indexing you buy the trash as well as the quality stocks and if you aren't going to complain when the market does extremely well, which it has for a long time, you shouldn't complain when things head south for a while. Expecting more than 2-4% real return is expecting too much in the long term.
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9-5 Suited
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Re: Stagflation Causing Negative Bonds/Stocks

Post by 9-5 Suited »

Probably not helpful to get into semantics on "stagflation" which I don't think you can really say we're experiencing now (and definitely can't predict if we would in the future).

Instead, it's simpler to say the following: stock and bond expected returns are lower now than they have been in most periods in recent history. The expected return on US Treasury bonds is 1-2% nominal depending on duration, and expected stock returns are something like 5-6% nominal if you are a fan of a valuation metric like CAPE for estimating the midpoint of real returns. Of course, the dispersion of outcomes can vary significantly from this, but it's a starting point.

That means there's a very real chance your balanced portfolio could lose money (especially in real terms) over the next 10 years. I don't personally believe there's a magic place to run with your money that will prevent this, but diversification is a good option. International stocks and value stocks (i.e. a value tilt) are my preferred ways of diversifying on the equity side and both are less expensive than the S&P 500 right now (another way of saying they are riskier, though ;)).

On the bond side, a healthy dose of iBonds and TIPS will help guard against inflation, but are no free lunch as you will lock in a negative real return on the TIPS and probably on the iBonds after tax. The key on bonds is duration matching your bonds to your investment time horizon, as at least that mitigates interest rate risk. Don't pay any attention to the 'rising rates are bad for bonds' comments you'll see everywhere. That's only true if your bond holdings have inappropriate duration.
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quantAndHold
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Re: Stagflation Causing Negative Bonds/Stocks

Post by quantAndHold »

We’re having some inflation, but the current unemployment rate is 3.9%, companies are having trouble hiring enough people, and demand for everything is so through the roof we’re having shortages.

Bonds are negative because there’s too much money sloshing around the system looking for things to invest in, which is driving bond prices (and stock, and housing, and everything else prices) up to infinity and beyond.
BitTooAggressive
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Re: Stagflation Causing Negative Bonds/Stocks

Post by BitTooAggressive »

Odie wrote: Thu Jan 20, 2022 8:12 am I'm retired and a three fund Vanguard investor-Bond VBTLX, Stock VINIX, Balanced VBIAX. Asset Allocation is 60% Bonds and 40% Stocks. Since my retirement in 2018 over all returns has been 26.6% so I'm feeling pretty good. However, the US is now experiencing stagflation similar to the 70s and early 80s. Stagflation is causing both Bonds and Stocks to go negative at the same time which usually does not happen. Stagflation started effecting the markets around November 2021 and is carry through in 2022.

YTD-VBTLX -2.34%, VINIX -3.92 VBIAX -4.28%.

Questions. How long will stagflation last? It lasted almost 10 years in the 70s and early 80s. What can be done with the AA to get even a modest return during this period? Add TIPS and precious metals? Or add money market funds when interest rates go up in 2022?
Diversify. Tips, International, small cap, value.
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greg24
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Re: Stagflation Causing Negative Bonds/Stocks

Post by greg24 »

Equities have been a rocket ship going straight up. I wouldn't think too much about one 3-month return period.
dbr
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Re: Stagflation Causing Negative Bonds/Stocks

Post by dbr »

Odie wrote: Thu Jan 20, 2022 8:12 am I'm retired and a three fund Vanguard investor-Bond VBTLX, Stock VINIX, Balanced VBIAX. Asset Allocation is 60% Bonds and 40% Stocks. Since my retirement in 2018 over all returns has been 26.6% so I'm feeling pretty good. However, the US is now experiencing stagflation similar to the 70s and early 80s. Stagflation is causing both Bonds and Stocks to go negative at the same time which usually does not happen. Stagflation started effecting the markets around November 2021 and is carry through in 2022.

YTD-VBTLX -2.34%, VINIX -3.92 VBIAX -4.28%.

Questions. How long will stagflation last? It lasted almost 10 years in the 70s and early 80s. What can be done with the AA to get even a modest return during this period? Add TIPS and precious metals? Or add money market funds when interest rates go up in 2022?
There is no chance you can use these observations to take any kind of meaningful action in investing. There is not stagflation or if there were it would not be possible to say so now. Market results from November to now are pure noise and mean nothing helpful to investment decision making. Bonds and stocks can often lose money at the same time. That does not mean anything.

Probably the biggest flaw in your data is not recognizing that your 26.6% gain is what is unusual, should not have been expected, and certainly will not persist. Feeling good about a big gain in a short time is making a big mistake. But you are lucky you got it, and the ten years of stock and bond returns before that. You now benefit from all that good luck which should be a store against things possibly not continuing that way.

As to action, the first step is to drop the idea that you can do something to ensure any particular return in any particular period. A 40/60 portfolio is a reasonable long term investment but the results will vary and can follow longer term secular trends that are very good or not so good.

As far as using a portfolio to support spending over long terms in retirement the largest single effect on long term security is your rate of spending. You could try modeling that in something like FireCalc to see if you are comfortable with your spending rate.
N.Y.Cab
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Re: Stagflation Causing Negative Bonds/Stocks

Post by N.Y.Cab »

Gold actually lost more than Total Bond Index last year so knowing that inflation is persistent wasn’t helpful. Add TIPs if you can hold on to them. Stay globally diversified.
tibbitts
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Re: Stagflation Causing Negative Bonds/Stocks

Post by tibbitts »

Odie wrote: Thu Jan 20, 2022 8:12 am Questions. How long will stagflation last? It lasted almost 10 years in the 70s and early 80s. What can be done with the AA to get even a modest return during this period? Add TIPS and precious metals? Or add money market funds when interest rates go up in 2022?
Why ask questions you know that nobody here has answers to? Under some circumstances you're just going to lose, and there's nothing you can do about it.
ScubaHogg
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Re: Stagflation Causing Negative Bonds/Stocks

Post by ScubaHogg »

November 2021 thru today is too short a time frame to extrapolate anything. It’s just noise.

That being said, no one anywhere knows the future
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
sycamore
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Re: Stagflation Causing Negative Bonds/Stocks

Post by sycamore »

Odie wrote: Thu Jan 20, 2022 8:12 am What can be done with the AA to get even a modest return during this period? Add TIPS and precious metals? Or add money market funds when interest rates go up in 2022?
I'm not into using gold/precious metals as an asset class so I'd say no to them.

One thing you can do is try to improve/maximize the return you get from fixed income. Instead using (TBM) Total Bond Market Index Fund for all your fixed income assets, put some of that money into:

a) I Bonds (limited to $10k/year/person plus an extra $5k on your tax return). Will at least preserve your cash purchasing power.

b) Search for better yielding High Yield Savings Accounts. Not guaranteed to keep up with inflation, but on a risk-adjusted basis may be better than TBM.

c) Search for better yielding CDs at banks & credit unions. Similar pro/con to using HYSA.

d) "Bonus chasing". Both banks and brokerages offer bonuses for transferring in assets (including mutual funds like yours). Like the newcomer Tastyworks brokerage has a $500 bonus for transferring $10k. Or Merrill Edge $1000 for $250k. There are restrictions about how long you have to keep the assets at the new place. And it costs you time to investigate and act on these offers. And there's the complexity of managing multiple accounts / passwords / tax forms. The Doctor of Credit website is a good starting point: https://www.doctorofcredit.com/best-ban ... t-bonuses/ and https://www.doctorofcredit.com/best-bro ... p-to-3500/
texasfight
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Re: Stagflation Causing Negative Bonds/Stocks

Post by texasfight »

VCMDX PDBC COMT

or replacing nominal treasuries with gold or TIPS has helped
hulburt1
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Re: Stagflation Causing Negative Bonds/Stocks

Post by hulburt1 »

Japan 20 years..
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