2022 "two fund" 50-50 second worst in history

[AlphaLess]

Lessons learned from 2022:
- 50/50 (or 60/40, or 70/30 either way) Bond/Stock allocation too can go to crap, as bond/stock correlation goes positive,
- TIPS are not really a good inflation hedge, for the simple purpose that TIPS have nominal yield curve plus real yield curve risk. Though TIPS are going up in value while inflation is building up, if nominal curve also goes up, then TIPS go down from that effect,
- planning for / against 50% stock drop years by diversifying into bonds (occasionally/rarely/very rarely) fails to work,
- put more money in the retirement egg basket than you think you will need.

[finite_difference]

We know 2022 was bad but just how bad was it.
Really bad.
Taking a peak at the Simba database annual returns, inflation adjusted (using 6.5% for 2022), leaving all defaults on "yes", going back to 1871, and mixing TSM and TBM 50-50, the worst five inflation adjusted returns were as follows.



2022 was the second worst "two fund" 50/50 returns in American history in 152 years, going back to 1871. Only 1917, just over a century ago, was worse. 2022 50/50 RETURNS were in the 0.7%th percentile. Which is ~2.5 standard deviations from the mean!

Just looking at TBM, the inflation adjusted return was the worst in entire 152 year history.

I'm curious how this recent 50/50 drawdown stacks up looking at monthly returns rather than end of year. (Looking at monthly data 12 month returns, just as bad. See reply below.)

It's interesting how 2022 doesn't really fit the pattern of the other dud years: 1917 was worst, but inflation was 20% after WW! govt spending. 1946 (the year the govt cut back dramatically on WW2 spending) has a somewhat similar relationship between bonds and stocks being equally bad (nowhere to hide); yet, again inflation that year was also close to 20%. 1937 is the one of the worst 5 with reasonably small inflation==but this was during the Great Depression and the drop was due to a crash in stocks not bonds.

Another interesting thing is that the subsequent 10 year real returns after these drops were low but not awful on the whole, thanks to stocks. (Note this is despite 10y subsequent bonds averaging close to 0% real in the four cases.)

But how do the last 2 years compare? Or the last 5?

Otherwise feels a bit like a calendar year quirk (begin/end date shenanigans).

[Dude2]

It might be time to stop saying bonds are for safety.

They are for safety of nominal future capital. They never promised safety of real capital; they never promised safety of present capital. As I have said many, many times.

You and Hector may have internalized that. Judging from some threads here, many other people here had not, and indeed many other people still have not.

If we had some sort of "like" feature, this sentiment should get most of the votes.

No matter how you slice it, with bonds there are certain "knowns". As a tool, one can use those knowns to their advantage. This is their role in a portfolio, in a business, in an economy. On the other hand, unknowns abound. This is life.

Some people come to the forum to learn stuff, and they can be served by getting a very good understanding of exactly what bonds are and what they are not. Nothing that has happened to bonds recently should shake anyone to their core. If this is the case, do not use that tool that you don't understand. You are likely not using it properly.

[gavinsiu]

Lessons learned from 2022:
- 50/50 (or 60/40, or 70/30 either way) Bond/Stock allocation too can go to crap, as bond/stock correlation goes positive,
- TIPS are not really a good inflation hedge, for the simple purpose that TIPS have nominal yield curve plus real yield curve risk. Though TIPS are going up in value while inflation is building up, if nominal curve also goes up, then TIPS go down from that effect,
- planning for / against 50% stock drop years by diversifying into bonds (occasionally/rarely/very rarely) fails to work,
- put more money in the retirement egg basket than you think you will need.

I think it is very difficult to completely protect a portfolio. I notice that my mom's 50/50 portfolio seemed to have lost less probably due to value tilt, but that combo can drag in a growth cycle and can also fall harder at times.

TIPS are not a good short term inflation hedge. They are a decent long term inflation hedge.

How did you do back in previous market drops? Did the bonds not work previously? If you expect that stocks and bonds will move in different directions during a market fall, well that is probably not going to happen. In most cases, having more bonds will cushion your fall. For example, a 50/50 portfolio worked pretty well in 2008. I would not say that it never works.

One thing to consider may be to create a bond ladder with somewhat lower expense so that if the market crash when you retire, you can collapse the ladder while you wait for your portfolio to recover.

[NiceUnparticularMan]

TIPS are not really a good inflation hedge, for the simple purpose that TIPS have nominal yield curve plus real yield curve risk. Though TIPS are going up in value while inflation is building up, if nominal curve also goes up, then TIPS go down from that effect

I think the problem here is you have to define what you are hedging.

If you are buying and holding fixed-income to provide a real income stream in USD, then TIPS are an excellent hedge against unexpected inflation. Note, though, they only hedge themselves--they cannot hedge other assets so are not a portfolio-level hedge.

If you are buying fixed-income on the hope you can sell it over a period well less than maturity in a favorable way, then TIPS are indeed at best a weak hedge against unexpected inflation. TIPS did do better than comparable Treasuries, but it is true the change in the real yield curve dominated the overall effect on TIPS market prices, which may well matter to you if you were hoping to sell TIPS during this period for some purpose.

All this just points to the importance of liability/duration matching with your fixed-income if you want to use them as very-low-risk assets. Of course if you want to use them as risky assets (on some theory), then maybe not so much. But risky is risky.

[JasonHutt]

TIPS are not really a good inflation hedge, for the simple purpose that TIPS have nominal yield curve plus real yield curve risk. Though TIPS are going up in value while inflation is building up, if nominal curve also goes up, then TIPS go down from that effect

I think the problem here is you have to define what you are hedging.

If you are buying and holding fixed-income to provide a real income stream in USD, then TIPS are an excellent hedge against unexpected inflation. Note, though, they only hedge themselves--they cannot hedge other assets so are not a portfolio-level hedge.

If you are buying fixed-income on the hope you can sell it over a period well less than maturity in a favorable way, then TIPS are indeed at best a weak hedge against unexpected inflation. TIPS did do better than comparable Treasuries, but it is true the change in the real yield curve dominated the overall effect on TIPS market prices, which may well matter to you if you were hoping to sell TIPS during this period for some purpose.

All this just points to the importance of liability/duration matching with your fixed-income if you want to use them as very-low-risk assets. Of course if you want to use them as risky assets (on some theory), then maybe not so much. But risky is risky.

Vanguard's short term tips were about -3% for the year, not having much sensitivity to interest rate risk.

[Charles Joseph]

This particular downturn has taught me the importance of having cash in my portfolio for short term needs. Bonds might not be there when I need them.

[Dude2]

This particular downturn has taught me the importance of having cash in my portfolio for short term needs. Bonds might not be there when I need them.

Bonds are going to "be there" in exactly the way that the bonds were purchased. When you bought them, you made a deal, and they will very, very, very likely hold true to the deal. That's it.

[tennisplyr]

So the helpful decision to be made based on this is...?

[Charles Joseph]

This particular downturn has taught me the importance of having cash in my portfolio for short term needs. Bonds might not be there when I need them.

Bonds are going to "be there" in exactly the way that the bonds were purchased. When you bought them, you made a deal, and they will very, very, very likely hold true to the deal. That's it.

Correct. And that deal is impacted by the bond fund’s duration. Thus my point remains.

[Freeadvice]

So the helpful decision to be made based on this is...?

Don’t buy bond funds? Buy individual bonds and hold?

[Johm221122]

So the helpful decision to be made based on this is...?

Don’t buy bond funds? Buy individual bonds and hold?

Not necessarily and it isn't all or nothing.

https://www.bogleheads.org/wiki/Individ ... _bond_fund

The major factors in deciding between owning individual bonds versus a bond fund are: diversification, convenience, costs, and control over maturity,

[Dude2]

This particular downturn has taught me the importance of having cash in my portfolio for short term needs. Bonds might not be there when I need them.

Bonds are going to "be there" in exactly the way that the bonds were purchased. When you bought them, you made a deal, and they will very, very, very likely hold true to the deal. That's it.

Correct. And that deal is impacted by the bond fund’s duration. Thus my point remains.

Absolutely. So take-away is probably that people should utilize these tools at various durations for their various needs. I might need a years worth of money to insulate me in case of job loss (or a short ladder). Other than that, if I'm thinking long term retirement money, I'm going to set my duration high, and I'm going to accept what I get. If we want to talk about changing the plan mid-course, which is fine, you never know what life will throw at you, then we might deviate from the plan at a bad time, and the longer the duration, the greater the impact could be of bad timing. A sensible approach might be to go intermediate duration and let it ride. With the yield curve as flat as it has been, why not?

Anyway, I guess I'm not motivated to consider the concept of using stocks and bonds as anti-correlated pairs that we flip flop around willy-nilly and hope that at any give instant in time we are ahead. Just invest in stocks and hope for the best. Otherwise, bonds are for safety. Bonds are money that I have put aside. They aren't going to make me rich. Hopefully stocks will.

[Charles Joseph]

This particular downturn has taught me the importance of having cash in my portfolio for short term needs. Bonds might not be there when I need them.

Bonds are going to "be there" in exactly the way that the bonds were purchased. When you bought them, you made a deal, and they will very, very, very likely hold true to the deal. That's it.

Correct. And that deal is impacted by the bond fund’s duration. Thus my point remains.

Absolutely. So take-away is probably that people should utilize these tools at various durations for their various needs. I might need a years worth of money to insulate me in case of job loss (or a short ladder). Other than that, if I'm thinking long term retirement money, I'm going to set my duration high, and I'm going to accept what I get. If we want to talk about changing the plan mid-course, which is fine, you never know what life will throw at you, then we might deviate from the plan at a bad time, and the longer the duration, the greater the impact could be of bad timing. A sensible approach might be to go intermediate duration and let it ride. With the yield curve as flat as it has been, why not?

Anyway, I guess I'm not motivated to consider the concept of using stocks and bonds as anti-correlated pairs that we flip flop around willy-nilly and hope that at any give instant in time we are ahead. Just invest in stocks and hope for the best. Otherwise, bonds are for safety. Bonds are money that I have put aside. They aren't going to make me rich. Hopefully stocks will.

This is a huge help. Thanks. I’ve read so much on here about people saying they have no need for cash. And my thought has always been “but what if I need money for a big ticket item the same time that stocks and bonds both tank? What do I do then?” So your thoughts are very helpful.

EDIT: I do see the benefit of more accurate duration matching but for me, I just “go intermediate duration and let it ride.” (Love that!). I might be paying a premium but it’s easy.

[JasonHutt]

So the helpful decision to be made based on this is...?

Don’t buy bond funds? Buy individual bonds and hold?

Not necessarily and it isn't all or nothing.

https://www.bogleheads.org/wiki/Individ ... _bond_fund

The major factors in deciding between owning individual bonds versus a bond fund are: diversification, convenience, costs, and control over maturity,

If you're retired or soon will be, if you want to ensure you will have money no matter what for a specified number of years, individual treasuries are the way to go, according to Bernstein. I guess I don't see any real value to a Treasury fund except if your retirement plan will not allow individual issues. However, if you plan to retire in x years, using a fund with an x duration would increase the chances that in your rollover IRA post retirement you will have funds to buy issues for a Treasury ladder. That's what I'm doing now. Within three years you go short term tips fund. Even last year that only dropped 3%, and this will self-correct shortly.

[AlohaBill]

My FXNAX is getting 3% ytd. Wohoo! Really, I don’t know what your point is. We’ve had a rather average bear market. Nothing like 1987 or 2000 to 2003 or 2007 to 2009. I’ll go back to watching the grass grow. Wake me when excitement rears its head.

[michaeljc70]

Lessons learned from 2022:
- 50/50 (or 60/40, or 70/30 either way) Bond/Stock allocation too can go to crap, as bond/stock correlation goes positive,
- TIPS are not really a good inflation hedge, for the simple purpose that TIPS have nominal yield curve plus real yield curve risk. Though TIPS are going up in value while inflation is building up, if nominal curve also goes up, then TIPS go down from that effect,
- planning for / against 50% stock drop years by diversifying into bonds (occasionally/rarely/very rarely) fails to work,
- put more money in the retirement egg basket than you think you will need.

+1

Of course, just about everyone knows bonds can have negative nominal/real returns, but many haven't experienced it at least to this extent. It is like investing in stocks knowing they can take a 50% hit....which is different than actually having a 50% hit. Until you get the hit the 1st time, you are just guessing how you will feel/react.

I considered supplementing BND with other fixed income but ultimately decided to just stick with it.

[martincmartin]

Great, another meaningless comparison based on arbitrary calendar boundaries.

1) Meaningless to be less than 1th percentile from 1871 to today (all recorded stock history)? End of year barometers are a common benchmark with meaning to many, and are published by most companies by law. That metric has it's limits, of course; but your arrogance is poor form.

It's the first time the market peak was on the first trading day of the year, Jan 3, 2022. That's certainly unusual, but I wouldn't call it bad.

2) You didn't care to add anything meaningful to my comment in OP wondering how the end-of-year results matched up with the more nuanced monthly drawdowns. Your point that annual "arbitrary" boundaries aren't everything is obvious, and I asked about it in my original post.

Not OP, but here's some data from an earlier thread. It's for 60/40. The max 60/40 drawdown since Jan 1, 2022 is -26.2%.

Code: Select all

   5.18 on Apr 1872 ->    2.73 on Jun 1877 (-47.30%)
   6.58 on Jun 1881 ->    3.81 on Aug 1896 (-42.10%)
   8.85 on Sep 1902 ->    6.26 on Oct 1903 (-29.27%)
  10.03 on Sep 1906 ->    6.25 on Nov 1907 (-37.69%)
   10.3 on Dec 1909 ->    6.45 on Aug 1921 (-37.38%)
   31.3 on Sep 1929 ->    4.77 on Jun 1932 (-84.76%)
  71.74 on Dec 1961 ->   55.63 on Jun 1962 (-22.46%)
  106.5 on Dec 1968 ->   75.59 on Jun 1970 (-29.02%)
  118.4 on Jan 1973 ->   67.07 on Dec 1974 (-43.35%)
  329.4 on Aug 1987 ->   241.0 on Dec 1987 (-26.84%)
1485.46 on Aug 2000 ->  837.03 on Feb 2003 (-43.65%)
1539.66 on Oct 2007 ->  757.13 on Mar 2009 (-50.82%)

While we're at it, we should also note the limitation of the symba synthesized return sets, with assumed expense ratios, the fact sp500 was used for tsm for early dates, mixing and matching different indexes, etc. But at the extremes of being a "one in 150 year event", these kind of details don't matter much.

Very true.

[Lawrence of Suburbia]

I still believe being a bit bond-heavy the first 5-10 years of retirement, then letting the stocks percentage increase (a "rising glidepath") is the best way to go.

[martincmartin]

Here's data for 50/50:

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Sep 1906 -> Oct 1907 (-22.10%)
Dec 1915 -> Jun 1920 (-43.63%)
Sep 1929 -> Jun 1932 (-40.59%)
Feb 1937 -> Apr 1938 (-21.60%)
Oct 1939 -> May 1942 (-24.65%)
Apr 1946 -> Feb 1948 (-27.68%)
Nov 1968 -> Jun 1970 (-22.28%)
Jan 1973 -> Sep 1974 (-33.65%)
Dec 1976 -> Sep 1981 (-26.38%)
Oct 2007 -> Mar 2009 (-21.79%)
Dec 2021 -> Oct 2022 (-23.76%)

This is using Shiller's data. As you see, the month-to-month drawdown for 2022 is -23.76%. Dot com was -16.10% for a 50/50 portfolio, Aug 2000 -> Feb 2003. The above table is for total real drawdown of 20% or more for a 50/50 portfolio, which is why dot com doesn't show up.

[heyyou]

by tennisplyr » Sat Jan 21, 2023 8:55 am
So the helpful decision to be made based on this is...?

Just expect to adapt, instead of striving for certainty.

[gavinsiu]

regarding the bond fund vs bonds, isn't this based on how you look at it. Let's say you setup a bond fund, it consists of a number of bonds like a bond ladder. When interest rate falls, both bond fund and bond ladder will fall in value. The difference is that with the ladder the bottom rung becomes due and you redeem it at full value because it has matured.

I feel that perhaps at retirement, you have to progress to either some system where you setup a bond ladder or maintain your AA but with less equity than your accumulation phase. In the case of the bond ladder, you setup a ladder to fund your retirement but the AA becomes secondary because it would be really tough to rebalance. In the case of maintaining an AA, you have a bond fund and a stock fund that you rebalance and during the rebalance you take out the part you need for income.

[martincmartin]

Edit: This is for a 60/40 portfolio.

For a 60/40 portfolio, according to Shiller data, the drop in 2022, in real (inflation adjusted) total returns, was 23.88%. This has happened 10 times in the 150 years of Shiller data, so on average every 15 years. So in a 30 year retirement, you should expect and be fully prepared for two drops this big or bigger. Of course, that's an average, you might get three drops, like the period from 1905 to 1935 or 1935 to 1965 or 1945 to 1975, or four drops, like 1915 to 1945 or 1928 to 1958.

I retired early last year. The stock and bond market performance last year has been comforting to me, because I "stress tested" my retirement scenario with historical data and made sure I wouldn't run out of money in even the worst historical scenarios. The drop last year is well within historical norms, so I sleep well at night. One thing that worries me is historically high CAPE ratios, perhaps they'll lead to a downturn that's bigger, or longer, than we've had in the past. But 2022 wasn't that.

Code: Select all

Sep 1906 -> Oct 1907 (-25.02%)
Dec 1915 -> Jun 1920 (-43.65%)
Sep 1929 -> Jun 1932 (-50.36%)
Feb 1937 -> Apr 1938 (-26.03%)
Oct 1939 -> May 1942 (-27.28%)
Apr 1946 -> Feb 1948 (-29.23%)
Nov 1968 -> Jun 1970 (-24.07%)
Jan 1973 -> Dec 1974 (-36.99%)
Oct 2007 -> Mar 2009 (-28.30%)
Dec 2021 -> Oct 2022 (-23.88%)
10 drops of at least 23.8% in 150 years, or a drop every 15.0 years on average.

[michaeljc70]

Out of the 10 worst real draw downs for a 50/50 portfolio, how many of those had a negative return for the bond portion?

[martincmartin]

Out of the 10 worst real draw downs for a 50/50 portfolio, how many of those had a negative return for the bond portion?

The above was actually for a 60/40 portfolio, here are the numbers for a 50/50 portfolio, with the real total changes in both stocks and bonds:

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Dec 1915 -> Jun 1920 (-43.63%, stocks: -44.15%, bonds: -44.10%)
Sep 1929 -> Jun 1932 (-40.59%, stocks: -76.80%, bonds: 38.15%)
Oct 1939 -> May 1942 (-24.65%, stocks: -37.27%, bonds: -10.79%)
Apr 1946 -> Feb 1948 (-27.68%, stocks: -35.38%, bonds: -19.91%)
Jan 1973 -> Sep 1974 (-33.65%, stocks: -48.64%, bonds: -15.29%)
Dec 1976 -> Sep 1981 (-26.38%, stocks: -10.77%, bonds: -40.66%)
Dec 2021 -> Oct 2022 (-23.76%, stocks: -24.47%, bonds: -23.30%)
50/50 stock/bond: 7 drops of at least 23% in 150 years, or a drop every 21.43 years on average.

So in all but one of these 7 drops of a 50/50 portfolio, bonds went down. And 1915 -> 1920, and 1976 -> 1981 were much worse for bonds.

[michaeljc70]

Out of the 10 worst real draw downs for a 50/50 portfolio, how many of those had a negative return for the bond portion?

The above was actually for a 60/40 portfolio, here are the numbers for a 50/50 portfolio, with the real total changes in both stocks and bonds:

Code: Select all

Dec 1915 -> Jun 1920 (-43.63%, stocks: -44.15%, bonds: -44.10%)
Sep 1929 -> Jun 1932 (-40.59%, stocks: -76.80%, bonds: 38.15%)
Oct 1939 -> May 1942 (-24.65%, stocks: -37.27%, bonds: -10.79%)
Apr 1946 -> Feb 1948 (-27.68%, stocks: -35.38%, bonds: -19.91%)
Jan 1973 -> Sep 1974 (-33.65%, stocks: -48.64%, bonds: -15.29%)
Dec 1976 -> Sep 1981 (-26.38%, stocks: -10.77%, bonds: -40.66%)
Dec 2021 -> Oct 2022 (-23.76%, stocks: -24.47%, bonds: -23.30%)
50/50 stock/bond: 7 drops of at least 23% in 150 years, or a drop every 21.43 years on average.

So in all but one of these 7 drops of a 50/50 portfolio, bonds went down. And 1915 -> 1920, and 1976 -> 1981, where much worse for bonds.

Interesting. Thanks

[firebirdparts]

It might be the second-worst market, but it's still a great time to be alive.

It sure is. And up about 10% or so YTD.

[jmk]

So take-away is probably that people should utilize these tools at various durations for their various needs. I might need a years worth of money to insulate me in case of job loss (or a short ladder).

It’s actually worse than that. If you’d bought vbtlx six years ago, thinking “I matched the duration”, you’d be up the creek. I used the avg weighted maturity rather than duration of vbtlx for liability matching. But even that 8.2y turned out to be un reliable.

[Logan Roy]

Lessons learned from 2022:
- 50/50 (or 60/40, or 70/30 either way) Bond/Stock allocation too can go to crap, as bond/stock correlation goes positive,
- TIPS are not really a good inflation hedge, for the simple purpose that TIPS have nominal yield curve plus real yield curve risk. Though TIPS are going up in value while inflation is building up, if nominal curve also goes up, then TIPS go down from that effect,
- planning for / against 50% stock drop years by diversifying into bonds (occasionally/rarely/very rarely) fails to work,
- put more money in the retirement egg basket than you think you will need.

I'd say a lesson is: don't buy 30 year bonds on 1% yields unless you think that's a return worth securing for 30 years.. The funny thing is (imo), the belief that market efficiency justified buying bonds on such appalling valuations was the same argument I remember people making about stocks just before the Tech crash.

I'd argue TIPS are still the perfect inflation hedge, over the duration of that TIPS.. You can buy 2 year inflation protection, or 30 year inflation protection .. The price swings/duration risk is what makes them such powerful portfolio tools. If they simply tracked inflation (like a ladder of very short-duration TIPS) you wouldn't get anywhere near the diversification benefits.

[NiceUnparticularMan]

So take-away is probably that people should utilize these tools at various durations for their various needs. I might need a years worth of money to insulate me in case of job loss (or a short ladder).

It’s actually worse than that. If you’d bought vbtlx six years ago, thinking “I matched the duration”, you’d be up the creek. I used the avg weighted maturity rather than duration of vbtlx for liability matching. But even that 8.2y turned out to be un reliable.

Yeah, buying nominal bonds exposes you to the possibility of permanent real losses, if inflation is higher than expected.

And all the more so if real rates were low to begin with.

[michaeljc70]

So the helpful decision to be made based on this is...?

If you need $$$ from your portfolio in the short to mid term, you may want to include CDs (preferably laddered) or a MM or a shorter term bond fund for at least a small portion of your portfolio. Or you can look at it like BND did really well in the 2008 crisis when stocks tanked and now it did poorly when stocks tanked and it mostly balances out. Given this rarely happens (at least to this degree), I'm just sticking with BND to keep things simple.

If you are early in the accumulation phase, I don't think there is any takeaway. I didn't even have bonds for the first 25 years I was investing.

[DoctorE]

Out of the 10 worst real draw downs for a 50/50 portfolio, how many of those had a negative return for the bond portion?

The above was actually for a 60/40 portfolio, here are the numbers for a 50/50 portfolio, with the real total changes in both stocks and bonds:

Code: Select all

Dec 1915 -> Jun 1920 (-43.63%, stocks: -44.15%, bonds: -44.10%)
Sep 1929 -> Jun 1932 (-40.59%, stocks: -76.80%, bonds: 38.15%)
Oct 1939 -> May 1942 (-24.65%, stocks: -37.27%, bonds: -10.79%)
Apr 1946 -> Feb 1948 (-27.68%, stocks: -35.38%, bonds: -19.91%)
Jan 1973 -> Sep 1974 (-33.65%, stocks: -48.64%, bonds: -15.29%)
Dec 1976 -> Sep 1981 (-26.38%, stocks: -10.77%, bonds: -40.66%)
Dec 2021 -> Oct 2022 (-23.76%, stocks: -24.47%, bonds: -23.30%)
50/50 stock/bond: 7 drops of at least 23% in 150 years, or a drop every 21.43 years on average.

So in all but one of these 7 drops of a 50/50 portfolio, bonds went down. And 1915 -> 1920, and 1976 -> 1981 were much worse for bonds.

Great data. Thanks for sharing this. It's refreshing to see someone post 'inflation-adjusted' returns and before 1980s for bonds!
I would add that you could post the final year returns for these periods because the end results were not as bad as these drawdowns make it look to be. Some of these pull backs are after big bull markets so the portfolio might not be underwater the original inflation adjusted amount.

[Dude2]

So take-away is probably that people should utilize these tools at various durations for their various needs. I might need a years worth of money to insulate me in case of job loss (or a short ladder).

It’s actually worse than that. If you’d bought vbtlx six years ago, thinking “I matched the duration”, you’d be up the creek. I used the avg weighted maturity rather than duration of vbtlx for liability matching. But even that 8.2y turned out to be un reliable.

Yeah, buying nominal bonds exposes you to the possibility of permanent real losses, if inflation is higher than expected.

And all the more so if real rates were low to begin with.

Exactly. We've got to be awake about risk and definitely question if the risk is worth the reward. Many of us say to take the risk on the equity side. Bonds are for safety. If this is money we're putting aside for job loss, definitely minimize the risk. I don't think anybody is advocating an emergency fund in TBM. However, taking a long view, TBM probably will do better than less risky TIPS investments.

[NiceUnparticularMan]

However, taking a long view, TBM probably will do better than less risky TIPS investments.

The odd thing is it appears the expected return difference between equivalent nominal Treasuries and TIPS is so low as to be negligible. So the unexpected inflation protection with TIPS is extremely cheap.

Something like TBM then adds some credit risk and such to a pure Treasuries fund with the same term structure. To me, though, the answer to that "problem" has always been just to hold a bit less in fixed income and a bit more in corporate stocks. And again, the "cost" of instead substituting the nominal bonds in TBM--many of which are Treasuries anyway--for TIPS is losing what appears to be extremely cheap unexpected inflation protection.

In other words, if I was looking to do something to my stocks/TIPS portfolio to try to juice its expected return, turning some of my TIPS to intermediate corporate bonds would be really low on my list of ideas to begin with, and then doing it specifically with TBM seems like a particularly inefficient way to add corporate bonds.

[Taylor Larimore]

So the helpful decision to be made based on this is...?

tennisplyr:

Stay the course.

Best wishes
Taylor

Jack Bogle's Words of Wisdom: "No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."

[HomerJ]

It might be time to stop saying bonds are for safety.

Bonds are still for safety... Just pay attention to the duration.

Total Bond is now paying out more than twice as much as before, approaching 3 times as much... So, yeah it dropped 20%, but now it's paying 4% a year (and still increasing) in dividends when a year ago it was paying around 1.5%-1.6%

Bond funds self-correct. Total Bond will make back its losses.

Money you need next year shouldn't be in Total Bond Index fund, but in a money-market or CD. Money you need in 2-3 years should be in a short-term bond fund, or a 2-3 year CD or TIPs.

[NiceUnparticularMan]

Bond funds self-correct. Total Bond will make back its losses.

In nominal terms. Not necessarily in real terms.

[toddthebod]

Bond funds self-correct. Total Bond will make back its losses.

In nominal terms. Not necessarily in real terms.

The yield on BND has been higher than inflation for 6 months and for most of its history. There's no reason to believe it won't make back its losses in real terms. I challenge you to find a single example of a bond fund with "permanent" real losses.

[NiceUnparticularMan]

I challenge you to find a single example of a bond fund with "permanent" real losses.

Well, the last time intermediate USD nominal bonds had large real losses was for such bonds bought in the mid-late 1960s, in advance of the unexpectedly high inflation that was soon to come.

Although from the perspective of the broader history of bonds that is not that long ago, it nonetheless is long enough ago to predate the creation of the USD nominal bond funds commonly used today.

Indeed, in the relatively short history of those bond funds, USD inflation has far more often been unexpectedly low than unexpectedly high, which has added to the real returns of such bond funds. This apparently has given a lot of people here the impression that is the natural order of things and will never change.

Logically, though, unexpectedly high and unexpectedly low inflation should be equally possible going forward. And historically, there have been long periods where it is more one than the other.

By the way, it is important to understand that a rolling nominal bond fund can take permanent real losses on the nominal bonds it is holding at a given time, but eventually over time those bonds will mature or will be sold, and will gradually be replaced with new bonds. The real returns on the new bonds can obviously then be something different.

But that doesn't mean those real losses on the bonds in the fund at the given time didn't happen. It just means as the fund rolls on, gradually the new bonds will come to dominate the returns.

[toddthebod]

I challenge you to find a single example of a bond fund with "permanent" real losses.

Well, the last time intermediate USD nominal bonds had large real losses was for such bonds bought in the mid-late 1960s, in advance of the unexpectedly high inflation that was soon to come.

Although from the perspective of the broader history of bonds that is not that long ago, it nonetheless is long enough ago to predate the creation of the USD nominal bond funds commonly used today.

Indeed, in the relatively short history of those bond funds, USD inflation has far more often been unexpectedly low than unexpectedly high, which has added to the real returns of such bond funds. This apparently has given a lot of people here the impression that is the natural order of things and will never change.

Logically, though, unexpectedly high and unexpectedly low inflation should be equally possible going forward. And historically, there have been long periods where it is more one than the other.

By the way, it is important to understand that a rolling nominal bond fund can take permanent real losses on the nominal bonds it is holding at a given time, but eventually over time those bonds will mature or will be sold, and will gradually be replaced with new bonds. The real returns on the new bonds can obviously then be something different.

But that doesn't mean those real losses on the bonds in the fund at the given time didn't happen. It just means as the fund rolls on, gradually the new bonds will come to dominate the returns.

I get what you are saying, and I think it's fair to say that duration matching is not sufficient to guarantee positive real returns, but historically-speaking, nominal interest rates in the intermediate time-horizon have almost always exceeded inflation:

So while you may lose money on a few bonds that were close to maturity, the replacement bonds could very well make back those losses.

[michaeljc70]

It might be time to stop saying bonds are for safety.

Bonds are still for safety... Just pay attention to the duration.

Total Bond is now paying out more than twice as much as before, approaching 3 times as much... So, yeah it dropped 20%, but now it's paying 4% a year (and still increasing) in dividends when a year ago it was paying around 1.5%-1.6%

Bond funds self-correct. Total Bond will make back its losses.

Money you need next year shouldn't be in Total Bond Index fund, but in a money-market or CD. Money you need in 2-3 years should be in a short-term bond fund, or a 2-3 year CD or TIPs.

I hear a lot of people say that. I think that is putting lipstick on a pig. That doesn't include the opportunity cost lost when bonds were in the gutter. That is sort of like holding a stock that went down 30% for 5 years and then it comes back. Did you do great? There were probably other investments that would have been better. The current yield on BND is obviously lower than inflation. I have all my FI in BND so I am not trying to say it is a bad investment for the long term. It was a bad investment for the last 12-18 months. Which, of course, I am not saying was predictable. I am counting on it for the long haul but let's be realistic.

With the 4% yield, 6.5% inflation and the around 18% loss in price from the peak to now how long will it take to "recover" in real terms?

[toddthebod]

It might be time to stop saying bonds are for safety.

Bonds are still for safety... Just pay attention to the duration.

Total Bond is now paying out more than twice as much as before, approaching 3 times as much... So, yeah it dropped 20%, but now it's paying 4% a year (and still increasing) in dividends when a year ago it was paying around 1.5%-1.6%

Bond funds self-correct. Total Bond will make back its losses.

Money you need next year shouldn't be in Total Bond Index fund, but in a money-market or CD. Money you need in 2-3 years should be in a short-term bond fund, or a 2-3 year CD or TIPs.

I hear a lot of people say that. I think that is putting lipstick on a pig. That doesn't include the opportunity cost lost when bonds were in the gutter. That is sort of like holding a stock that went down 30% for 5 years and then it comes back. Did you do great? There were probably other investments that would have been better. The current yield on BND is obviously lower than inflation. I have all my FI in BND so I am not trying to say it is a bad investment for the long term. It was a bad investment for the last 12-18 months. Which, of course, I am not saying was predictable. I am counting on it for the long haul but let's be realistic.

With the 4% yield, 6.5% inflation and the around 18% loss in price from the peak to now how long will it take to "recover" in real terms?

Inflation has been zero for the last six months. A lump sum investment at BND's peak in August 2020 is down 10% in real terms right now. If we experience market-expecated-inflation of ~2.5% going forward and BND continues to yield 4%, we'll make that back in about 6-7 years. Considering BND's real yield was negative 1-2% in 2020, it looks like we'll actually be ahead of expectations.

[michaeljc70]

It might be time to stop saying bonds are for safety.

Bonds are still for safety... Just pay attention to the duration.

Total Bond is now paying out more than twice as much as before, approaching 3 times as much... So, yeah it dropped 20%, but now it's paying 4% a year (and still increasing) in dividends when a year ago it was paying around 1.5%-1.6%

Bond funds self-correct. Total Bond will make back its losses.

Money you need next year shouldn't be in Total Bond Index fund, but in a money-market or CD. Money you need in 2-3 years should be in a short-term bond fund, or a 2-3 year CD or TIPs.

I hear a lot of people say that. I think that is putting lipstick on a pig. That doesn't include the opportunity cost lost when bonds were in the gutter. That is sort of like holding a stock that went down 30% for 5 years and then it comes back. Did you do great? There were probably other investments that would have been better. The current yield on BND is obviously lower than inflation. I have all my FI in BND so I am not trying to say it is a bad investment for the long term. It was a bad investment for the last 12-18 months. Which, of course, I am not saying was predictable. I am counting on it for the long haul but let's be realistic.

With the 4% yield, 6.5% inflation and the around 18% loss in price from the peak to now how long will it take to "recover" in real terms?

Inflation has been zero for the last six months. A lump sum investment at BND's peak in August 2020 is down 10% in real terms right now. If we experience market-expecated-inflation of ~2.5% going forward and BND continues to yield 4%, we'll make that back in about 6-7 years. Considering BND's real yield was negative 1-2% in 2020, it looks like we'll actually be ahead of expectations.

Down 10% in real terms? Who looks at a security that way? So a stock you bought 2 years ago that is down 13% you didn't lose any money on? Come on. You actually lost 26% real! I guess if looking at your losses in real terms in high inflation times makes you feel better....

Politicians quote the month to month inflation for their speeches when they don't have anything better to say. It wasn't nothing. It was around 1%.

[NiceUnparticularMan]

So while you may lose money on a few bonds that were close to maturity, the replacement bonds could very well make back those losses.

Well, consider that chart. If, say, in 1965 you bought a 10-year Treasury at the market prices/yields in 1965, then by the time the bond matured in 1975 and your final returns were determined, you had permanent large real losses. That didn't depend on that bond being close to maturity, just the opposite, the real loss was so large because you bought a new longer nominal bond right before a long "bad" period for nominal bonds.

Now it is true if you then took all the proceeds from such a bond as of 1975 and then reinvested them in a new 10-year bond, ultimately that second 10-year bond would have done better than the first. But note for the first half or so of that period, it would have actually continued to be really bad in real terms, it just got really good finally on the back half.

And generally, there is no particular reason to believe that the next bonds will do really well just because the last bonds did really poorly. It is more just that whatever happens with them is a new roll of the dice.

Now it is true that if all you do is imagine just continuing to roll your bond investment on and on, never withdrawing always just reinvesting, it becomes less and less relevant what these periods equal to the term of your bonds looked like.

But if, say, you were actually planning to use a lot of those returns during those periods for spending, and specifically for spending which went up with inflation, then the fact the first 10-year bond took a permanent real loss, and the second 10-year bond was doing so poorly on the front end, starts to matter quite a bit.

All this is just illustrating a couple points. First, bond funds don't somehow magically make real losses on the individual bonds they hold go away. Second, new bonds bought by the fund may or may not have better real returns, and the degree to which you participate in those returns will depend on things like your reinvestment/withdrawal rate.

[michaeljc70]

So while you may lose money on a few bonds that were close to maturity, the replacement bonds could very well make back those losses.

Well, consider that chart. If, say, in 1965 you bought a 10-year Treasury at the market prices/yields in 1965, then by the time the bond matured in 1975 and your final returns were determined, you had permanent large real losses. That didn't depend on that bond being close to maturity, just the opposite, the real loss was so large because you bought a new longer nominal bond right before a long "bad" period for nominal bonds.

Now it is true if you then took all the proceeds from such a bond as of 1975 and then reinvested them in a new 10-year bond, ultimately that second 10-year bond would have done better than the first. But note for the first half or so of that period, it would have actually continued to be really bad in real terms, it just got really good finally on the back half.

And generally, there is no particular reason to believe that the next bonds will do really well just because the last bonds did really poorly. It is more just that whatever happens with them is a new roll of the dice.

Now it is true that if all you do is imagine just continuing to roll your bond investment on and on, never withdrawing always just reinvesting, it becomes less and less relevant what these periods equal to the term of your bonds looked like.

But if, say, you were actually planning to use a lot of those returns during those periods for spending, and specifically for spending which went up with inflation, then the fact the first 10-year bond took a permanent real loss, and the second 10-year bond was doing do poorly on the front end, starts to matter quite a bit.

All this is just illustrating a couple points. First, bond funds don't somehow magically make real losses on the individual bonds they hold go away. Second, new bonds bought by the fund may or may not have better real returns, and the degree to which you participate in those returns will depend on things like your reinvestment/withdrawal rate.

That is a good summary.

[NiceUnparticularMan]

If we experience market-expecated-inflation of ~2.5% going forward and BND continues to yield 4%, we'll make that back in about 6-7 years. Considering BND's real yield was negative 1-2% in 2020, it looks like we'll actually be ahead of expectations.

That's a lot of assumptions.

But sure, if you assume that the real returns on the bonds held by BND as of summer of 2020 end up only modestly lower than the already low expected real returns over the full term of those bonds, and then further assume that the new bonds that BND rolls into going forward perpetually have higher expected real rates than they did in the summer of 2020, and then further assume they actually get those real rates, then in enough years the assumed higher real returns on the new bonds will outweigh the assumed only-modestly-lower real returns on the old bonds.

And we can check back in like 4 or so more years to see what actually happens.

[toddthebod]

It might be time to stop saying bonds are for safety.

Bonds are still for safety... Just pay attention to the duration.

Total Bond is now paying out more than twice as much as before, approaching 3 times as much... So, yeah it dropped 20%, but now it's paying 4% a year (and still increasing) in dividends when a year ago it was paying around 1.5%-1.6%

Bond funds self-correct. Total Bond will make back its losses.

Money you need next year shouldn't be in Total Bond Index fund, but in a money-market or CD. Money you need in 2-3 years should be in a short-term bond fund, or a 2-3 year CD or TIPs.

I hear a lot of people say that. I think that is putting lipstick on a pig. That doesn't include the opportunity cost lost when bonds were in the gutter. That is sort of like holding a stock that went down 30% for 5 years and then it comes back. Did you do great? There were probably other investments that would have been better. The current yield on BND is obviously lower than inflation. I have all my FI in BND so I am not trying to say it is a bad investment for the long term. It was a bad investment for the last 12-18 months. Which, of course, I am not saying was predictable. I am counting on it for the long haul but let's be realistic.

With the 4% yield, 6.5% inflation and the around 18% loss in price from the peak to now how long will it take to "recover" in real terms?

Inflation has been zero for the last six months. A lump sum investment at BND's peak in August 2020 is down 10% in real terms right now. If we experience market-expecated-inflation of ~2.5% going forward and BND continues to yield 4%, we'll make that back in about 6-7 years. Considering BND's real yield was negative 1-2% in 2020, it looks like we'll actually be ahead of expectations.

Down 10% in real terms? Who looks at a security that way?

Everybody?

I guess if looking at your losses in real terms in high inflation times makes you feel better....

Do you know what real means?

Politicians quote the month to month inflation for their speeches when they don't have anything better to say. It wasn't nothing. It was around 1%.

No, people quote year-over-year inflation when they want to exaggerate or are being disingenuous. Your statement above, "4% yield, 6.5% inflation" you are trying to imply that current real yields are negative and inflation is still 6.5%. That's being disingenuous. Real yields are the highest they've been in 14 years.

[michaeljc70]

Bonds are still for safety... Just pay attention to the duration.

Total Bond is now paying out more than twice as much as before, approaching 3 times as much... So, yeah it dropped 20%, but now it's paying 4% a year (and still increasing) in dividends when a year ago it was paying around 1.5%-1.6%

Bond funds self-correct. Total Bond will make back its losses.

Money you need next year shouldn't be in Total Bond Index fund, but in a money-market or CD. Money you need in 2-3 years should be in a short-term bond fund, or a 2-3 year CD or TIPs.

I hear a lot of people say that. I think that is putting lipstick on a pig. That doesn't include the opportunity cost lost when bonds were in the gutter. That is sort of like holding a stock that went down 30% for 5 years and then it comes back. Did you do great? There were probably other investments that would have been better. The current yield on BND is obviously lower than inflation. I have all my FI in BND so I am not trying to say it is a bad investment for the long term. It was a bad investment for the last 12-18 months. Which, of course, I am not saying was predictable. I am counting on it for the long haul but let's be realistic.

With the 4% yield, 6.5% inflation and the around 18% loss in price from the peak to now how long will it take to "recover" in real terms?

Inflation has been zero for the last six months. A lump sum investment at BND's peak in August 2020 is down 10% in real terms right now. If we experience market-expecated-inflation of ~2.5% going forward and BND continues to yield 4%, we'll make that back in about 6-7 years. Considering BND's real yield was negative 1-2% in 2020, it looks like we'll actually be ahead of expectations.

Down 10% in real terms? Who looks at a security that way?

Everybody?

I guess if looking at your losses in real terms in high inflation times makes you feel better....

Do you know what real means?

Politicians quote the month to month inflation for their speeches when they don't have anything better to say. It wasn't nothing. It was around 1%.

No, people quote year-over-year inflation when they want to exaggerate or are being disingenuous. Your statement above, "4% yield, 6.5% inflation" you are trying to imply that current real yields are negative and inflation is still 6.5%. That's being disingenuous. Real yields are the highest they've been in 14 years.

Umm..no. Of course I know what real is. Show me any major investment company publishing real returns on their website instead of nominal. Yields are almost always quoted in nominal terms and so are returns. Go to the threads on here about "What are you up this year?" No one quotes real numbers.

Yields on a bond or bond fund are 12 month yields so comparing that to a 1 month or 6 month inflation number is disingenuous.

[toddthebod]

I hear a lot of people say that. I think that is putting lipstick on a pig. That doesn't include the opportunity cost lost when bonds were in the gutter. That is sort of like holding a stock that went down 30% for 5 years and then it comes back. Did you do great? There were probably other investments that would have been better. The current yield on BND is obviously lower than inflation. I have all my FI in BND so I am not trying to say it is a bad investment for the long term. It was a bad investment for the last 12-18 months. Which, of course, I am not saying was predictable. I am counting on it for the long haul but let's be realistic.

With the 4% yield, 6.5% inflation and the around 18% loss in price from the peak to now how long will it take to "recover" in real terms?

Inflation has been zero for the last six months. A lump sum investment at BND's peak in August 2020 is down 10% in real terms right now. If we experience market-expecated-inflation of ~2.5% going forward and BND continues to yield 4%, we'll make that back in about 6-7 years. Considering BND's real yield was negative 1-2% in 2020, it looks like we'll actually be ahead of expectations.

Down 10% in real terms? Who looks at a security that way?

Everybody?

I guess if looking at your losses in real terms in high inflation times makes you feel better....

Do you know what real means?

Politicians quote the month to month inflation for their speeches when they don't have anything better to say. It wasn't nothing. It was around 1%.

No, people quote year-over-year inflation when they want to exaggerate or are being disingenuous. Your statement above, "4% yield, 6.5% inflation" you are trying to imply that current real yields are negative and inflation is still 6.5%. That's being disingenuous. Real yields are the highest they've been in 14 years.

Umm..no. Of course I know what real is. Show me any major investment company publishing real returns on their website instead of nominal. Yields are almost always quoted in nominal terms and so are returns. Go to the threads on here about "What are you up this year?" No one quotes real numbers.

Yields on a bond or bond fund are 12 month yields so comparing that to a 1 month or 6 month inflation number is disingenuous.

Since you know what real means, then explain how "looking at your losses in real terms in high inflation makes you feel better"?

Yields on a bond fund are forward-looking. Inflation numbers are backward-looking. Comparing next year's bond yield to last year's inflation is meaningless. If my $100,000 bond investment today earns $4,000 next year, you can't turn around and say, no, you didn't really earn $4,000 because inflation was 6.5% from December 2021-December 2022.

[michaeljc70]

Inflation has been zero for the last six months. A lump sum investment at BND's peak in August 2020 is down 10% in real terms right now. If we experience market-expecated-inflation of ~2.5% going forward and BND continues to yield 4%, we'll make that back in about 6-7 years. Considering BND's real yield was negative 1-2% in 2020, it looks like we'll actually be ahead of expectations.

Down 10% in real terms? Who looks at a security that way?

Everybody?

I guess if looking at your losses in real terms in high inflation times makes you feel better....

Do you know what real means?

Politicians quote the month to month inflation for their speeches when they don't have anything better to say. It wasn't nothing. It was around 1%.

No, people quote year-over-year inflation when they want to exaggerate or are being disingenuous. Your statement above, "4% yield, 6.5% inflation" you are trying to imply that current real yields are negative and inflation is still 6.5%. That's being disingenuous. Real yields are the highest they've been in 14 years.

Umm..no. Of course I know what real is. Show me any major investment company publishing real returns on their website instead of nominal. Yields are almost always quoted in nominal terms and so are returns. Go to the threads on here about "What are you up this year?" No one quotes real numbers.

Yields on a bond or bond fund are 12 month yields so comparing that to a 1 month or 6 month inflation number is disingenuous.

Since you know what real means, then explain how "looking at your losses in real terms in high inflation makes you feel better"?

Yields on a bond fund are forward-looking. Inflation numbers are backward-looking. Comparing next year's bond yield to last year's inflation is meaningless. If my $100,000 bond investment today earns $4,000 next year, you can't turn around and say, no, you didn't really earn $4,000 because inflation was 6.5% from December 2021-December 2022.

You're the one that said BND is only down 10% real from Aug 2020. That is not correct but I took it at face value.

No, fund yields are not forward looking. They typically quote the SEC 30 day which is the dividends and interest earned by a mutual fund during the most recent 30-day period