Vanguard Predicts 1.31% Return for Bonds

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LMK5
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Vanguard Predicts 1.31% Return for Bonds

Post by LMK5 »

Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by Ramjet »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
I don't hold them yet because I'm still 20 years from retirement, but if I was closer to retirement I would hold them as a ballast. The alternative is more equities and hoping there isn't a stock market drop in the years heading into retirement, a risk I would be unwilling to take most likely. Very bleak looking returns though :|
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by CurlyDave »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
IMHO their record is absolutely terrible.

Just a single example. Back in January 2012 they were prediction long term 6-9% returns for stocks. As of 9/30/2021 the 10 year CAGR for SPY was 16.5%. This is not just a miss, it is a miss of legendary proportion.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by markjk »

Any long term estimate is very difficult to trust. The truth is, no one knows and no amount of data, analytics, charts, etc. can make any prediction a lock. So many things can change which impact long term estimates. That's why if you go back and really look at projections, most are way off. The longer the projection time horizon, the less likely it is to be accurate.

I think treating bonds as what they are, protection against volatility, is the way to go. I'd focus more on your asset allocation than these specific return numbers. That goes for stocks or bonds. Figure out your AA and stick with it regardless of projections.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by dbr »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
What do they predict for the risk, for example the standard deviation of annual returns.

This kind of prediction does not affect the asset allocation I will continue to hold because:

1. The prediction is likely to be garbage.

2. We hold bonds so that the overall volatility of the portfolio is somewhat suppressed. There is no reason to believe stocks no longer have a much larger expected standard deviation of returns than do bonds.

3. Nothing we need from our portfolio is endangered if those are good estimates of returns.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by 3CT_Paddler »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
Right now it is likely worse than stated on bonds and inflation.

For the year we are going to be looking at an inflation rate in the 4-5% range, with a yield on the 10-year Treasury around 1.3%. If this continues for another 12 months, you are looking at a real return of -5% or more over 24 months.

Look at the period between 1940 and 1980 where you had a real negative return on bonds for an extended amount of time.

Image

The reason you hold bonds is that stocks are volatile assets. Unfortunately savers must choose between volatile assets at a high premium that may send their balance crashing or fixed income with a likely negative real return.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by JackoC »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
Let's assume we accepted those as median returns across a wide range of possibilities particularly for stocks and inflation (which is what it says they are in the fine print, not 'this is exactly what will happen'). It's saying the margin in return of stocks over bonds, expected* equity risk premium would be 4.02-1.31=2.71%. The historical numbers they give are 10.37% stock, 5.30% bond, or a 5.07% realized premium. Do you think the risk of stocks relative to bonds will be less than historical? If not, accepting those return estimates would seem to imply more not less reason now to hold bonds. Though you'd have to save more to expect to reach a given goal (or lower your goal) due to the absolutely low returns.

On the numbers, starting with the last first, the 10 yr point on the Daily Yield Curve yesterday was 1.64%, the 10 yr real curve point -1.02%, breaks even at 2.66% CPI-U inflation (and it was 2.35% July 1, this paper is dated July 8 but probably wasn't done that day). Maybe some median/expected skew there, and the TIPS breakeven has some miscellaneous elements relative to expected inflation but the conventional assumption would be to use the TIPS breakeven, not seeing why they use something as low as 1.58%.

On stock the simple theoretical assumption is real expected return =1/PE. Using CAPE as the PE that would be around 1/39.08=2.5% real for the S&P, which would correspond roughly to nominal number if inflation is around 1.6%, but I'd estimate inflation as the TIPS B/E and say ~2.5%+~2.7%=~5.2% nominal expected return for US stock (probably derails things to start talking about non-US).

For bonds I'd simply use the 10 yr yield. If you have a 10 yr horizon and simply invest today in the 10 yr...there's not a whole lot to 'forecast' (just the reinvestment rates on the small coupons). And, unless you think the term premium is highly positive or negative (the NY Fed's ACM models says it's about zero) the expected return in investing in govt bonds by any method out to 10 yrs (buy a 5 yr and roll into another 5 yr, buy a 10 yr now, sell it in one year to buy another 10 yr and so on for 10 yrs, etc.) isn't much different.

So summary for rough planning purposes I'd say (US) stock ~5.2% nominal, US bond ~1.6% nominal, CPI-U inflation ~2.7%. But again assuming so, stocks have a return advantage narrower than historical, so I'm not sure why the question would be about holding any bonds. Although personally I would determine asset allocation based on what I can tolerate in specific downside scenario's and it would only secondarily be affected by the expected ERP.

*median and expected return are not the same thing mathematical nitpickers will note but close enough for a general discussion of a highly uncertain outcome. Though median v expected skew might be a factor in for example the inflation number.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by jebmke »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds?
Same reason I always sail with an anchor onboard; prevent/slow backward motion under adverse circumstances.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by secondopinion »

CurlyDave wrote: Tue Oct 26, 2021 8:47 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
IMHO their record is absolutely terrible.

Just a single example. Back in January 2012 they were prediction long term 6-9% returns for stocks. As of 9/30/2021 the 10 year CAGR for SPY was 16.5%. This is not just a miss, it is a miss of legendary proportion.
6%-9% maybe have been a bad prediction, but it is acceptable returns. If they have a constant record of being too conservative, then take it as a reassurance that holding stocks is a good thing.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by willthrill81 »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by billthecat »

willthrill81 wrote: Tue Oct 26, 2021 10:00 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
Out of curiosity I tried to look up the yield to maturity for SCHZ (Schwab TBM), and it only shows "--". In other words, it doesn't say. Why would that be?
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by willthrill81 »

billthecat wrote: Tue Oct 26, 2021 11:00 am
willthrill81 wrote: Tue Oct 26, 2021 10:00 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
Out of curiosity I tried to look up the yield to maturity for SCHZ (Schwab TBM), and it only shows "--". In other words, it doesn't say. Why would that be?
It's on their site. The SEC yield is 1.40%, and the average YTM is 1.53%.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by billthecat »

willthrill81 wrote: Tue Oct 26, 2021 11:05 am
billthecat wrote: Tue Oct 26, 2021 11:00 am
willthrill81 wrote: Tue Oct 26, 2021 10:00 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
Out of curiosity I tried to look up the yield to maturity for SCHZ (Schwab TBM), and it only shows "--". In other words, it doesn't say. Why would that be?
It's on their site. The SEC yield is 1.40%, and the average YTM is 1.53%.
Well that's odd. At their site, it shows:

Image
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by willthrill81 »

billthecat wrote: Tue Oct 26, 2021 11:27 am
willthrill81 wrote: Tue Oct 26, 2021 11:05 am
billthecat wrote: Tue Oct 26, 2021 11:00 am
willthrill81 wrote: Tue Oct 26, 2021 10:00 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
Out of curiosity I tried to look up the yield to maturity for SCHZ (Schwab TBM), and it only shows "--". In other words, it doesn't say. Why would that be?
It's on their site. The SEC yield is 1.40%, and the average YTM is 1.53%.
Well that's odd. At their site, it shows:

Image
The SEC yield at the page I linked to above was as of 10/22/2021.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by protagonist »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
I would suggest you read three things:
1. The Book of Predictions (by Wallace et. al, published around 1980). A used copy is now available on Amazon for $3.05 and it might be the best $3.05 you ever spent.
2. Chaos (by James Gleick).
3. This article from the New Yorker: https://www.newyorker.com/magazine/2005 ... -an-expert

They will prove to be much more useful to you than all the financial porn, and a lot more fun to read. You will never worry about somebody's future predictions or model again.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by billthecat »

willthrill81 wrote: Tue Oct 26, 2021 11:29 am
billthecat wrote: Tue Oct 26, 2021 11:27 am
willthrill81 wrote: Tue Oct 26, 2021 11:05 am
billthecat wrote: Tue Oct 26, 2021 11:00 am
willthrill81 wrote: Tue Oct 26, 2021 10:00 am

The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
Out of curiosity I tried to look up the yield to maturity for SCHZ (Schwab TBM), and it only shows "--". In other words, it doesn't say. Why would that be?
It's on their site. The SEC yield is 1.40%, and the average YTM is 1.53%.
Well that's odd. At their site, it shows:

Image
The SEC yield at the page I linked to above was as of 10/22/2021.
I know - I'm asking about the yield to maturity, which is just "--" on their main site:
Image
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by Nate79 »

willthrill81 wrote: Tue Oct 26, 2021 10:00 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
Do you know what is the historical track record of yield to maturity of TBM vs actual returns over those time periods? This is something I've been curious to see.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by afan »

Vanguard's forecast accuracy: As far as I know, Vanguard does not publish any systematic analysis of the accuracy of its forecasts. I don't know of any commercial forecaster who does. The forecasts are often far off the mark. They could be handy as an estimate of what others in the investment business think may happen. They may be useful for inputs into planning scenarios as long as you also include a wide range of outcomes, better and worse, in addition the the figures you get from V, or anyone else.

I use 1% real as my base case. By coincidence, that happens to correspond to Vanguards estimates. I do not take that number all that seriously and I run scenarios considerably worse than that. I used to run scenarios better than 1% but I decided that better than forecasted returns would not require any adjustments in my financial plans, so there was no point in running those numbers.

Just as no one knows that stock returns will be a year from now or 10 years from now, no one knows what inflation will be. Maybe it will keep going up. Maybe we will hit double digits. Maybe it will go down. No basis for assuming even the Fed knows the future inflation numbers. They have a target, which may or may not be what happens.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by Taylor Larimore »

Bogleheads:

I pay no attention to stock and bond predictions (most turn-out to be wrong). Look at our 2021 Boglehead Contest to see Boglehead U.S. stock predictions :oops:

Bonds are primarily to provide safety in a portfolio. In 2008 when the U.S. stock market plunged -37.8%, Vanguard's Total Bond Market gained +5.0%.

Bond returns are mostly meaningless because in bonds, almost without exception, the higher the expected return the higher the expected risk. If higher return is our goal, it is much more efficient to increase our percentage of stocks.

Best wishes.
Taylor
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by jebmke »

Taylor Larimore wrote: Tue Oct 26, 2021 11:53 am Bogleheads:

I pay no attention to stock and bond predictions (most turn-out to be wrong). Look at our 2021 Boglehead Contest to see Boglehead U.S. stock predictions :oops:

Bonds are primarily to provide safety in a portfolio. In 2008 when the U.S. stock market plunged -37.8%, Vanguard's Total Bond Market gained +5.0%.

Bond returns are mostly meaningless because in bonds, almost without exception, the higher the expected return the higher the expected risk. If higher return is our goal, it is much more efficient to increase our percentage of stocks.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The Lehman Bond Index (total bond market), in substance, is an appropriate choice for investors with an intermediate-term time horizon and seeking top quality ."
Well said. I don't pay any attention to predictions either -- especially ones that go out to two digits after the decimal point. I pay even less attention to historical returns, which, while they have a higher likelihood of not being wrong, they aren't generally actionable.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by tibbitts »

Taylor Larimore wrote: Tue Oct 26, 2021 11:53 am Bond returns are mostly meaningless because in bonds, almost without exception, the higher the expected return the higher the expected risk. If higher return is our goal, it is much more efficient to increase our percentage of stocks.
That's true for credit risk, but I'm not sure about inflation risk, which is seemingly the larger concern at the moment.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by willthrill81 »

Nate79 wrote: Tue Oct 26, 2021 11:45 am
willthrill81 wrote: Tue Oct 26, 2021 10:00 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
Do you know what is the historical track record of yield to maturity of TBM vs actual returns over those time periods? This is something I've been curious to see.
IIRC, the difference between YTM and actual returns has nearly always been no more than +/- 1%.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by prioritarian »

I don't hold bonds for their return at all.
I hold them as ballast (volatility dampening, sequence of returns) and as diversification which should result in a better risk-adjusted return (sharpe ratio) than a 100% equity position over the long-term.

Portfolio 1: 100% Total Stock Market
Portfolio 2: 80% Total Stock Market + 20% Long Treasuries
Portfolio 3: 70% Total Stock Market + 30% Long Treasuries

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Re: Vanguard Predicts 1.31% Return for Bonds

Post by namajones »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/
That prediction and $4.15 will get you a large coffee at Starbucks.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by abc132 »

Meaningful values often include deviation from the expected value.

If we could take that stock rate to the bank, we would all be 100% stocks.

It is because of the error bars that I hold bonds.

I plan to spend nominal bonds roughly at their duration and I don't see anything better that is not a bond that can make this guarantee.

The takeaway from Vanguard is that stocks and bonds look bad historically, which is already included in most Boglehead (>80% success) plans.
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LMK5
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by LMK5 »

Anyone using international bonds as a diversifier? If so, what's your allocation?
Escapevelocity
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by Escapevelocity »

The only bonds worth buying at the moment are I-Bonds with their guaranteed zero percent real yield. That said, I still have about 25% of my portfolio in short term government bonds and TIPs due to the $10k annual limit on I-Bonds. I have another $200k in HYSA FDIC in banks.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by JackoC »

willthrill81 wrote: Tue Oct 26, 2021 12:50 pm
Nate79 wrote: Tue Oct 26, 2021 11:45 am
willthrill81 wrote: Tue Oct 26, 2021 10:00 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.

The 10 year break-even point on TIPS is currently 2.66%. That's generally taken to be a very good estimate of the market's inflation expectations. Vanguard's inflation estimate is a full percentage point lower.

It's been much more difficult to estimate forward returns on stocks, but Vanguard is predicting about 2.5% real returns for U.S. stocks over the next decade. Every model of forward stock returns I've seen is estimating returns closer to 0% real over the same period.
Do you know what is the historical track record of yield to maturity of TBM vs actual returns over those time periods? This is something I've been curious to see.
IIRC, the difference between YTM and actual returns has nearly always been no more than +/- 1%.
And anyway the question is whether the SEC yield is the *best estimate*. There are a lot of silly discussions on this forum where people say the quoted expected return of something was 'wrong' because the realized return turned out something different. If there's any randomness of course the realized will turn out different than the expected. The rational question is whether the expected was the *best estimate* of the unknown future realized return or whether it's biased high or low. SEC yield is not biased high or low as estimate of expected return for a treasury fund to an investment horizon equal to its maturity if we assume the NY Fed's term structure model is correct and the term premium is approx. 0. The SEC yield will be a slight overstatement of expected return of a TBM fund at zero term premium because of the credit and call/prepayment risk elements.*

There's not much merit in trying to argue bond returns will be healthy. The price the arguably most efficient, most liquid asset market in the world, for US govt bonds, will pay tells you returns are expected to stink. Better assume so, unless kidding yourself gives some kind of 'behavioral economics' advantage that will prevent you doing something irrational.

On stocks there's always more room to argue but I don't agree 'every forward model' estimates stock expected return at 0% real. The simple estimate is earning yield, 1/PE is the real expected return. The derivation has been given many times, the assumptions are not totally unrealistic. If PE is taken as CAPE, that comes out ~2.5% real expected return now (would have been 2.7% in July), though adding to the TIPS breakeven rather than Vanguard's mysterious 1.58% for inflation gives 5%+ nominal rather than 4%. Forecasts which come up with 0% (or less) real expected return for stocks are saying the future expected valuation is lower than now. The 1/PE estimate implicitly assumes valuation is as likely to go further up as down.

*1. Term premium, meaning the difference between expected return from rolling over short term instruments to a given horizon vs. just locking in the current rate to that horizon. If it's positive then a 9yr average maturity fund will have some additional expected return sometimes called 'roll return', to a 9yr horizon compared to the SEC yield. But now the NY Fed's ACM model estimates the term premium as about zero, so expected return for 9yrs on a 9yr fund would be the SEC yield, except:
2. a TBM fund has some credit risk and some call/prepayment risk. You're being given extra spread to take those risks, compared to same maturity treasuries, but the expected value of credit and call/prepayment losses are worth at least part of what you're paid to take them, using the full SEC yield is assuming the extra spread is free money.
Last edited by JackoC on Tue Oct 26, 2021 2:55 pm, edited 1 time in total.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by UpperNwGuy »

LMK5 wrote: Tue Oct 26, 2021 1:48 pm Anyone using international bonds as a diversifier? If so, what's your allocation?
Hedged or unhedged? Developed markets or emerging?
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by LMK5 »

UpperNwGuy wrote: Tue Oct 26, 2021 2:54 pm
LMK5 wrote: Tue Oct 26, 2021 1:48 pm Anyone using international bonds as a diversifier? If so, what's your allocation?
Hedged or unhedged? Developed markets or emerging?
Developed markets, hedged.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by cflannagan »

namajones wrote: Tue Oct 26, 2021 1:11 pm
That prediction and $4.15 will get you a large coffee at Starbucks.
Bold prediction. I'm not so sure $4.15 would get you that much.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by grabiner »

willthrill81 wrote: Tue Oct 26, 2021 10:00 am
LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
The yield to maturity of Vanguard's VBTLX, a TBM fund, is currently 1.42%. That's a very good estimate of the fund's forward return over its duration, which is almost 9 years. Vanguard's estimate there seems reasonable.
The duration is 6.8 years; you were reading the maturity.

To get a 10-year duration, you would need 1/3 Total Bond Market and 1/3 Long-Term Bond Index (2.65% SEC yield), for an overall yield of 1.83%. Thus, even given a few defaults, 1.31% seems a bit pessimistic for 10-year bond returns. If 5% of the corporate bonds default (about the historical default rate for BBBs, and thus high for corporate bonds which are only half BBB), that would be 2% of all the bonds, and a 1% loss if there is a 50% recovery on defaults; this would reduce the 10-year return by only 0.1%.
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Vanguard predicts bond returns somewhere between oh maybe 0.2% and 2.8%

Post by nisiprius »

Rather than saying "Vanguard predicts 1.31% return for bonds" I think it would be cite Vanguard's prediction accurately. It had a range, not just a median.

Try: "Vanguard predicts bond returns somewhere between oh maybe 0.2% and 2.8%"

Source

Image

At least you get to see Vanguard's own evaluation of the degree of uncertainty in their prediction.

Any of the following could happen and Vanguard could still say their prediction was not wrong:

--Treasurys could lose money
--Treasurys could beat corporate bonds
--Cash could beat high-yield corporate bonds
--There could be deflation

Very likely the true uncertainty is even more than that.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by Bama12 »

Taylor Larimore wrote: Tue Oct 26, 2021 11:53 am Bogleheads:

I pay no attention to stock and bond predictions (most turn-out to be wrong). Look at our 2021 Boglehead Contest to see Boglehead U.S. stock predictions :oops:

Bonds are primarily to provide safety in a portfolio. In 2008 when the U.S. stock market plunged -37.8%, Vanguard's Total Bond Market gained +5.0%.

Bond returns are mostly meaningless because in bonds, almost without exception, the higher the expected return the higher the expected risk. If higher return is our goal, it is much more efficient to increase our percentage of stocks.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The Lehman Bond Index (total bond market), in substance, is an appropriate choice for investors with an intermediate-term time horizon and seeking top quality ."
Taylor what are your thoughts on Vanguard S-T Infl-Prot SEC IDX (VTAPX)?

I'm a slice and dice guy with stocks but keep bonds simple, Vanguard Total. I see a lot on here talking about Tips and I-Bonds to me they seem to be chasing a few pennies.

I could add VTAPX to my 401k but I don't really see the need.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by abuss368 »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
I take what the markets give at the lost cost. Bonds have a placement in the construction of a well diversified portfolio. They provide safety and income.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by abuss368 »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
In addition, many years ago I read a lot of forecasts. The constantly checked forecast to our portfolio. I no longer waste time. I have not read a forecast in years. No disrespect to Vanguard, but no one has a crystal ball that works!

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by Activesloth »

I’m 64 and retired. I don’t hold any bonds. I think the opportunity cost is too high. I currently have 5% in cash which should be enough for 4 or 5 years in the event of a market crash.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by Grt2bOutdoors »

I put no stock in Vanguard's predictions. Just look at their track record on international (I rest my case.) I read GMO's 7 year Forecast with regularity, they've been preaching negative real returns now in both equities and fixed income for at least 2 years if not more, it hasn't shown up yet. One day, one or more of them may be right but who knows? My own prediction of a down year in this years 2021 Boglehead contest is way off the mark, thankfully I don't eat my own cooking on predictions of where the S&P 500 will end up.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by pascalwager »

LMK5 wrote: Tue Oct 26, 2021 1:48 pm Anyone using international bonds as a diversifier? If so, what's your allocation?
Yes, I currently use 19.6% of my four-fund portfolio (BNDX, BND, VTI, VXUS) as posted in the BH wiki. It updates every day.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by namajones »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/
Bank of America forecasts negative price returns for S&P 500 over next decade:

https://www.sharecast.com/news/broker-r ... 89943.html

Dirty little secret of financial forecasters is that, like journalists, they "crib" off of one another. In other words, they do the sheep dance, which morphs into "consensus."

Bottom line: ignore all this BS. Stick with your investment plan. Remain well diversified.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by dcabler »

LMK5 wrote: Tue Oct 26, 2021 8:31 am Vanguard Capital Markets Model is predicting a 10 year median annual return of 1.31% for US bonds, 4.02% for stocks, and 1.58% for inflation:
https://investornews.vanguard/fueling-t ... -retirees/

Given this, what is your personal case for holding bonds? Does VCMM have a good track record in predicting market returns?
Given this, I don't do anything differently. This is the bogleheads forum where "stay the course" is supposed to be the norm and one doesn't change one's allocations based on predictions.

cheers.
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Re: Vanguard Predicts 1.31% Return for Bonds

Post by Taylor Larimore »

"Vanguard Predicts 1.31% Return for Bonds"

Bogleheads:

In my opinion stock and bond market forecasts are almost meaningless. For example, Bank of America currently ranks 468 out of 636 S&P forecasts in our 2021 Boglehead Contest.

Note: Registration for the 2022 Contest will be during the first week in 2022.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."
"Simplicity is the master key to financial success." -- Jack Bogle
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