The recent risk-adjusted returns of stocks and bonds

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Fremdon Ferndock
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The recent risk-adjusted returns of stocks and bonds

Post by Fremdon Ferndock »

A statement I recently read from a Bridgewater paper got my attention: the returns from bonds are now worse than stocks on a risk-adjusted basis.

So, I headed to Portfolio Visualizer to check this out, and sure enough it's true.
From 1972-2022, the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = 0.37
50/50 (rebalanced annually) = 0.52

So, all seems well here, although I find it interesting that the Sharpe for stocks is actually a little higher than for intermediate treasuries since 1972. However, a 50/50 allocation produced a higher Sharpe than either illustrating the benefit of diversification.

But, since 2020 things began to change. From 2020-22 the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = -0.25
50/50 = 0.37

Different picture. The risk-adjusted returns for stocks held up, but not for bonds. and the 50/50 allocation had a lower risk-adjusted return than for stocks indicating that diversification wasn't working as well.

Finally, for 2022 the Sharpe ratios have been:
U.S. Stocks = -2.78
Intermediate Treasuries = -3.19
50/50 = -3.60

So, for this year the Sharpe ratio for stocks is (relatively) less terrible than for bonds, and interestingly the 50/50 Sharpe is even worse indicating that diversification has been counter-productive.

So, it looks like Bridgewater is right: paradoxically, on a risk-adjusted basis stocks have been outperforming bonds. And holding bonds has actually diminished portfolio returns on a risk-adjusted basis.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by nisiprius »

If bonds are held for a time period that is short compared to their duration, their returns will be volatile.

When discussing the risks of stocks and bonds, I feel that the following chart is an historic fact that is useful to know.

Source

Image
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Re: The recent risk-adjusted returns of stocks and bonds

Post by willthrill81 »

nisiprius wrote: Sun Jul 03, 2022 10:24 am I feel that the following chart is a reasonable answer to contorted attempts to prove that stocks are less risky than bonds:
I get your point, but we need to define risk before we can evaluate how risky different investments are. For instance, stocks held for 20+ years have been more likely to at least retain their buying power than nominal bonds.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by dbr »

Risk adjusted return (aka Sharpe ratio) might be an interesting statistic. The missing piece is whether or not that particular figure of merit is meaningful to the objectives of an investor. People seeking optimization always seek ways to reduce the dimensions of the problem in trading off unlike properties and reducing ambiguity, making things like Sharpe ratio an interesting idea. Whether or not a person wants to make investment decisions by that criterion is another question.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by rkhusky »

Fremdon Ferndock wrote: Sun Jul 03, 2022 9:37 am
But, since 2020 things began to change. From 2020-22 the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = -0.25
50/50 = 0.37
I would not base any investment decision on a 2-year analysis. Especially a 2-year period that covers a once in a century global pandemic.

Goes to show that timing the bond market can be just as difficult as timing the stock market.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by Zeno »

Fremdon Ferndock wrote: Sun Jul 03, 2022 9:37 am A statement I recently read from a Bridgewater paper got my attention: the returns from bonds are now worse than stocks on a risk-adjusted basis.

So, I headed to Portfolio Visualizer to check this out, and sure enough it's true.
From 1972-2022, the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = 0.37
50/50 (rebalanced annually) = 0.52

So, all seems well here, although I find it interesting that the Sharpe for stocks is actually a little higher than for intermediate treasuries since 1972. However, a 50/50 allocation produced a higher Sharpe than either illustrating the benefit of diversification.

But, since 2020 things began to change. From 2020-22 the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = -0.25
50/50 = 0.37

Different picture. The risk-adjusted returns for stocks held up, but not for bonds. and the 50/50 allocation had a lower risk-adjusted return than for stocks indicating that diversification wasn't working as well.

Finally, for 2022 the Sharpe ratios have been:
U.S. Stocks = -2.78
Intermediate Treasuries = -3.19
50/50 = -3.60

So, for this year the Sharpe ratio for stocks is (relatively) less terrible than for bonds, and interestingly the 50/50 Sharpe is even worse indicating that diversification has been counter-productive.

So, it looks like Bridgewater is right: paradoxically, on a risk-adjusted basis stocks have been outperforming bonds. And holding bonds has actually diminished portfolio returns on a risk-adjusted basis.
Curious
Last edited by Zeno on Mon Jul 11, 2022 9:12 pm, edited 1 time in total.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by CletusCaddy »

Zeno wrote: Sun Jul 03, 2022 11:37 am
Fremdon Ferndock wrote: Sun Jul 03, 2022 9:37 am A statement I recently read from a Bridgewater paper got my attention: the returns from bonds are now worse than stocks on a risk-adjusted basis.

So, I headed to Portfolio Visualizer to check this out, and sure enough it's true.
From 1972-2022, the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = 0.37
50/50 (rebalanced annually) = 0.52

So, all seems well here, although I find it interesting that the Sharpe for stocks is actually a little higher than for intermediate treasuries since 1972. However, a 50/50 allocation produced a higher Sharpe than either illustrating the benefit of diversification.

But, since 2020 things began to change. From 2020-22 the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = -0.25
50/50 = 0.37

Different picture. The risk-adjusted returns for stocks held up, but not for bonds. and the 50/50 allocation had a lower risk-adjusted return than for stocks indicating that diversification wasn't working as well.

Finally, for 2022 the Sharpe ratios have been:
U.S. Stocks = -2.78
Intermediate Treasuries = -3.19
50/50 = -3.60

So, for this year the Sharpe ratio for stocks is (relatively) less terrible than for bonds, and interestingly the 50/50 Sharpe is even worse indicating that diversification has been counter-productive.

So, it looks like Bridgewater is right: paradoxically, on a risk-adjusted basis stocks have been outperforming bonds. And holding bonds has actually diminished portfolio returns on a risk-adjusted basis.
So what do you recommend?

I'm 58; 65/32/3; and at 44x. Holding both equity and bond funds has worked wonderfully for us over the decades. Why? We tune out the noise, take a long-term view and LBYM. I've also never read a Bridgewater paper.

If you can offer investment recommendations for me on the cusp of retirement that differ from what we have been doing for nearly four decades now and that guarantee better returns, please do. I'm all ears.
I, for one, recommend commodities and TIPS.

It’s clear that the traditional stock/bond portfolio is woefully underprepared to face even moderate bouts of inflation.

A 20% allocation to commodities would have saved a lot of portfolios this year, while only being a minor drag on performance in prior years. An insurance policy well worth the cost.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by rockstar »

nisiprius wrote: Sun Jul 03, 2022 10:24 am If bonds are held for a time period that is short compared to their duration, their returns will be volatile.

When discussing the risks of stocks and bonds, I feel that the following chart is an historic fact that is useful to know.

Source

Image
This doesn't say what you think it does. The 10 year treasury yield provided a 4.78% rate in July of 2007. Your return over this time period is almost spot on with the rate. So bonds essentially returned their yield. If you were to do this going forward, total bond should return around 3%. So now the bar is for equities to return more than 3% annualized over the next 10 years if you start right now.

https://fred.stlouisfed.org/series/DGS10
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Re: The recent risk-adjusted returns of stocks and bonds

Post by rockstar »

CletusCaddy wrote: Sun Jul 03, 2022 12:00 pm
Zeno wrote: Sun Jul 03, 2022 11:37 am
Fremdon Ferndock wrote: Sun Jul 03, 2022 9:37 am A statement I recently read from a Bridgewater paper got my attention: the returns from bonds are now worse than stocks on a risk-adjusted basis.

So, I headed to Portfolio Visualizer to check this out, and sure enough it's true.
From 1972-2022, the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = 0.37
50/50 (rebalanced annually) = 0.52

So, all seems well here, although I find it interesting that the Sharpe for stocks is actually a little higher than for intermediate treasuries since 1972. However, a 50/50 allocation produced a higher Sharpe than either illustrating the benefit of diversification.

But, since 2020 things began to change. From 2020-22 the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = -0.25
50/50 = 0.37

Different picture. The risk-adjusted returns for stocks held up, but not for bonds. and the 50/50 allocation had a lower risk-adjusted return than for stocks indicating that diversification wasn't working as well.

Finally, for 2022 the Sharpe ratios have been:
U.S. Stocks = -2.78
Intermediate Treasuries = -3.19
50/50 = -3.60

So, for this year the Sharpe ratio for stocks is (relatively) less terrible than for bonds, and interestingly the 50/50 Sharpe is even worse indicating that diversification has been counter-productive.

So, it looks like Bridgewater is right: paradoxically, on a risk-adjusted basis stocks have been outperforming bonds. And holding bonds has actually diminished portfolio returns on a risk-adjusted basis.
So what do you recommend?

I'm 58; 65/32/3; and at 44x. Holding both equity and bond funds has worked wonderfully for us over the decades. Why? We tune out the noise, take a long-term view and LBYM. I've also never read a Bridgewater paper.

If you can offer investment recommendations for me on the cusp of retirement that differ from what we have been doing for nearly four decades now and that guarantee better returns, please do. I'm all ears.
I, for one, recommend commodities and TIPS.

It’s clear that the traditional stock/bond portfolio is woefully underprepared to face even moderate bouts of inflation.

A 20% allocation to commodities would have saved a lot of portfolios this year, while only being a minor drag on performance in prior years. An insurance policy well worth the cost.
A basket of commodities has done badly if held long term.

https://am.jpmorgan.com/us/en/asset-man ... e-markets/ (slide 61) -2.6% since 2007

TIPS make sense now with high inflation. But will they still make sense when inflation comes back down to 3%?

You run the risk of performance chasing fixed income and commodities. Commodities are more trading assets than buy and hold assets.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by dbr »

rockstar wrote: Sun Jul 03, 2022 12:31 pm
TIPS make sense now with high inflation. But will they still make sense when inflation comes back down to 3%?
Of course TIPS still make sense. You get whatever real risk and return they always have, and that is the purpose.

If a person wants to get mixed up in which bonds "beat" which other bonds during some interval of time, that is their choice. Other investors figure getting real return from TIPS, whatever it might be, makes sense. One thing that has to be disposed of is the false implication that TIPS don't "protect" against expected inflation but only against unexpected inflation.

Also, while I am not an enthusiast for backtesting, between 2001 and 2022 VIPSX returned 4.63% CAGR compared to 3.67% for VBMFX, albeit at a higher risk. Between the two funds the extremes were a better best year for TIPS without worse worst years, the max drawdowns being -12.5% for TIPS and -12.3% for total bond. Compound inflation rate over those years was about 2.4%, which is a low inflation period.

For me the investing mistake was to not do what seemed right and invest 100% TIPS from 2001 instead of waiting till 2021 to do that.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by Fremdon Ferndock »

I just thought it was counter-intuitive that safe intermediate-term bonds actually have a risk-adjusted return that is worse than stocks over the recent period, when all the attention is on stocks. And bonds haven't been doing much to improve portfolio risk-considered returns, which is what investors have come to expect. Maybe it's the bonds...
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Re: The recent risk-adjusted returns of stocks and bonds

Post by willthrill81 »

dbr wrote: Sun Jul 03, 2022 1:28 pm
rockstar wrote: Sun Jul 03, 2022 12:31 pm TIPS make sense now with high inflation. But will they still make sense when inflation comes back down to 3%?
Of course TIPS still make sense. You get whatever real risk and return they always have, and that is the purpose.
Bingo. The biggest risk to fixed income has historically been unexpected inflation and by a large margin. TIPS (and I bonds) remove that risk entirely and for a premium so small that many argue about whether it's basically zero. Why would one voluntarily take on the biggest risk to fixed income for no expected gain? Trying to game the bond market and guess what future inflation will be is highly speculative at best.

Another obvious point here is that inflation in the U.S. was 2% before it spiked to 8.6%. If one waits until unexpected inflation shows up before moving from nominals into TIPS or I bonds, it's too late.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by willthrill81 »

Fremdon Ferndock wrote: Sun Jul 03, 2022 1:57 pm I just thought it was counter-intuitive that safe intermediate-term bonds actually have a risk-adjusted return that is worse than stocks over the recent period, when all the attention is on stocks. And bonds haven't been doing much to improve portfolio risk-considered returns, which is what investors have come to expect. Maybe it's the bonds...
That point would have been better received than the OP. The bottom line is that the bond party from 1981-2012 strongly colored many investors' views of the future, despite the very clear math involved saying otherwise, and rising interest rates and inflation, which have been slashing bonds' buying power, have shown that bonds are not the 'safe haven' that many thought them to be. Since July of 2020, TBM has last 22% of its buying power, and the pain isn't over yet.

History has already shown that bonds can have poor returns for a long time. They returned -1.6% real from 1941-1981.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by Marseille07 »

willthrill81 wrote: Sun Jul 03, 2022 2:02 pm Why would one voluntarily take on the biggest risk to fixed income for no expected gain? Trying to game the bond market and guess what future inflation will be is highly speculative at best.

Another obvious point here is that inflation in the U.S. was 2% before it spiked to 8.6%. If one waits until unexpected inflation shows up before moving from nominals into TIPS or I bonds, it's too late.
So far it's actually not too bad as the Ten crashed from 3.5% to 2.9%. I don't understand what they're thinking (or if they're thinking) but it is what it is.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by CletusCaddy »

rockstar wrote: Sun Jul 03, 2022 12:31 pm
CletusCaddy wrote: Sun Jul 03, 2022 12:00 pm
Zeno wrote: Sun Jul 03, 2022 11:37 am
Fremdon Ferndock wrote: Sun Jul 03, 2022 9:37 am A statement I recently read from a Bridgewater paper got my attention: the returns from bonds are now worse than stocks on a risk-adjusted basis.

So, I headed to Portfolio Visualizer to check this out, and sure enough it's true.
From 1972-2022, the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = 0.37
50/50 (rebalanced annually) = 0.52

So, all seems well here, although I find it interesting that the Sharpe for stocks is actually a little higher than for intermediate treasuries since 1972. However, a 50/50 allocation produced a higher Sharpe than either illustrating the benefit of diversification.

But, since 2020 things began to change. From 2020-22 the Sharpe ratios were:
U.S. Stocks = 0.42
Intermediate Treasuries = -0.25
50/50 = 0.37

Different picture. The risk-adjusted returns for stocks held up, but not for bonds. and the 50/50 allocation had a lower risk-adjusted return than for stocks indicating that diversification wasn't working as well.

Finally, for 2022 the Sharpe ratios have been:
U.S. Stocks = -2.78
Intermediate Treasuries = -3.19
50/50 = -3.60

So, for this year the Sharpe ratio for stocks is (relatively) less terrible than for bonds, and interestingly the 50/50 Sharpe is even worse indicating that diversification has been counter-productive.

So, it looks like Bridgewater is right: paradoxically, on a risk-adjusted basis stocks have been outperforming bonds. And holding bonds has actually diminished portfolio returns on a risk-adjusted basis.
So what do you recommend?

I'm 58; 65/32/3; and at 44x. Holding both equity and bond funds has worked wonderfully for us over the decades. Why? We tune out the noise, take a long-term view and LBYM. I've also never read a Bridgewater paper.

If you can offer investment recommendations for me on the cusp of retirement that differ from what we have been doing for nearly four decades now and that guarantee better returns, please do. I'm all ears.
I, for one, recommend commodities and TIPS.

It’s clear that the traditional stock/bond portfolio is woefully underprepared to face even moderate bouts of inflation.

A 20% allocation to commodities would have saved a lot of portfolios this year, while only being a minor drag on performance in prior years. An insurance policy well worth the cost.
A basket of commodities has done badly if held long term.

https://am.jpmorgan.com/us/en/asset-man ... e-markets/ (slide 61) -2.6% since 2007

TIPS make sense now with high inflation. But will they still make sense when inflation comes back down to 3%?

You run the risk of performance chasing fixed income and commodities. Commodities are more trading assets than buy and hold assets.
Commodities are an insurance policy. What is the expected return on your car insurance? Home insurance? Almost certainly negative every year. Is that a reason not to hold them?
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Re: The recent risk-adjusted returns of stocks and bonds

Post by willthrill81 »

CletusCaddy wrote: Sun Jul 03, 2022 7:03 pm Commodities are an insurance policy. What is the expected return on your car insurance? Home insurance? Almost certainly negative every year. Is that a reason not to hold them?
I view gold held in a portfolio in that way (i.e., as a form of quasi portfolio insurance).
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Re: The recent risk-adjusted returns of stocks and bonds

Post by theac »

nisiprius wrote: Sun Jul 03, 2022 10:24 am If bonds are held for a time period that is short compared to their duration, their returns will be volatile.

When discussing the risks of stocks and bonds, I feel that the following chart is an historic fact that is useful to know.

Source

Image
I know this probably goes against what most people think about money, but for a few thousand dollars more, one way or the other, I much prefer being on the ride of that blue line, than the red line.

If someone takes a slightly deeper look at that red line, there are no doubt many sleepless nights and stressful moments when riding the red line, than those that you will experience when riding the blue line.

You can't put a price on quality of life, and stress to me is an indicator of poor quality of life. And I have to wonder how much of that profit made on the red line went to the pharmaceutical companies for antacids, sleeping pills, or whatever, and how much time does it shave off of a person's life in the long run, etc.

Thanks for the chart, reminds me why I bought a ticket on the blue line! :happy
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Re: The recent risk-adjusted returns of stocks and bonds

Post by rockstar »

theac wrote: Sun Jul 03, 2022 7:43 pm
nisiprius wrote: Sun Jul 03, 2022 10:24 am If bonds are held for a time period that is short compared to their duration, their returns will be volatile.

When discussing the risks of stocks and bonds, I feel that the following chart is an historic fact that is useful to know.

Source

Image
I know this probably goes against what most people think about money, but for a few thousand dollars more, one way or the other, I much prefer being on the ride of that blue line, than the red line.

If someone takes a slightly deeper look at that red line, there are no doubt many sleepless nights and stressful moments when riding the red line, than those that you will experience when riding the blue line.

You can't put a price on quality of life, and stress to me is an indicator of poor quality of life. And I have to wonder how much of that profit made on the red line went to the pharmaceutical companies for antacids, sleeping pills, or whatever, and how much time does it shave off of a person's life in the long run, etc.

Thanks for the chart, reminds me why I bought a ticket on the blue line! :happy
If the return you get on the blue line is good enough to meet your future needs, then there is no reason to take on the added risk. The bigger the future return you need the more risk you have to take on. And there is no guarantee that the risk will provide the reward.

Right now, the ten year gets you roughly 3% annualized. That is what I would expect from the blue line if you bought it all today. If you bought it all yesterday, it's significantly lower.
Last edited by rockstar on Sun Jul 03, 2022 7:54 pm, edited 1 time in total.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by dbr »

theac wrote: Sun Jul 03, 2022 7:43 pm


I know this probably goes against what most people think about money, but for a few thousand dollars more, one way or the other, I much prefer being on the ride of that blue line, than the red line.

If someone takes a slightly deeper look at that red line, there are no doubt many sleepless nights and stressful moments when riding the red line, than those that you will experience when riding the blue line.

You can't put a price on quality of life, and stress to me is an indicator of poor quality of life. And I have to wonder how much of that profit made on the red line went to the pharmaceutical companies for antacids, sleeping pills, or whatever, and how much time does it shave off of a person's life in the long run, etc.

Thanks for the chart, reminds me why I bought a ticket on the blue line! :happy
That is exactly why people sit down and think through their asset allocation. The practical choices are usually not the red line or the blue one but a mixture of the two that suits what the investor wants to do.

I would stress, however, that the course of those two lines is highly dependent on the time periods observed. That particular chart is picked for a time period in which stocks had lots of volatilty and an average growth rate that was not very good. If you run the same chart starting in 2015 and ending today the stock line leaves you twice as much money as the bond line, after the current YTD losses, but it still has lots of heart stopping volatility.

A somewhat more sophisticated assessment is needed to decide what one really wants. You pays yer money and you takes yer choice.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by willthrill81 »

theac wrote: Sun Jul 03, 2022 7:43 pm
nisiprius wrote: Sun Jul 03, 2022 10:24 am If bonds are held for a time period that is short compared to their duration, their returns will be volatile.

When discussing the risks of stocks and bonds, I feel that the following chart is an historic fact that is useful to know.

Source

Image
I know this probably goes against what most people think about money, but for a few thousand dollars more, one way or the other, I much prefer being on the ride of that blue line, than the red line.

If someone takes a slightly deeper look at that red line, there are no doubt many sleepless nights and stressful moments when riding the red line, than those that you will experience when riding the blue line.

You can't put a price on quality of life, and stress to me is an indicator of poor quality of life. And I have to wonder how much of that profit made on the red line went to the pharmaceutical companies for antacids, sleeping pills, or whatever, and how much time does it shave off of a person's life in the long run, etc.

Thanks for the chart, reminds me why I bought a ticket on the blue line! :happy
That chart was purposefully selected with certain dates in mind. Extend it, even to the current stock bear market, and the conclusions derived may be very different.

Image

In the 15 years above, the blue line resulted in an 11% increase in one's buying power, while the red line resulted in a 136% increase.

Those who endured were rewarded well.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by dbr »

rockstar wrote: Sun Jul 03, 2022 7:50 pm
If the return you get on the blue line is good enough to meet your future needs, then there is no reason to take on the added risk. The bigger the future return you need the more risk you have to take on. And there is no guarantee that the risk will provide the reward.
That is exactly right. A typical case where this comes to the fore is trying to finance a retirement using the one asset allocation or the other. For example it is a pretty good estimate that if you want to finance a 4% withdrawal rate for 30 years there is pretty much no chance a 100% TBM portfolio will get you there and there is a fairly good chance a 60/40 portfolio of stock and bonds will get you there. And if the latter is tending to fall a little short, small adjustments to withdrawals will likely fix the problem.

On the other hand if you want to spend at 2% or 1% or some level where you just have way more money than you want to use, then all bonds is fine and you get the benefit of much less upset. Of course this does bring up the question of why you even care about the upset if you have far more money than you will ever use, but that is up to the person. Such a person would probably also see no value in having still more money either.
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Re: The recent risk-adjusted returns of stocks and bonds

Post by theac »

willthrill81 wrote: Sun Jul 03, 2022 7:52 pm
theac wrote: Sun Jul 03, 2022 7:43 pm
nisiprius wrote: Sun Jul 03, 2022 10:24 am If bonds are held for a time period that is short compared to their duration, their returns will be volatile.

When discussing the risks of stocks and bonds, I feel that the following chart is an historic fact that is useful to know.

Source

Image
I know this probably goes against what most people think about money, but for a few thousand dollars more, one way or the other, I much prefer being on the ride of that blue line, than the red line.

If someone takes a slightly deeper look at that red line, there are no doubt many sleepless nights and stressful moments when riding the red line, than those that you will experience when riding the blue line.

You can't put a price on quality of life, and stress to me is an indicator of poor quality of life. And I have to wonder how much of that profit made on the red line went to the pharmaceutical companies for antacids, sleeping pills, or whatever, and how much time does it shave off of a person's life in the long run, etc.

Thanks for the chart, reminds me why I bought a ticket on the blue line! :happy
That chart was purposefully selected with certain dates in mind. Extend it, even to the current stock bear market, and the conclusions derived may be very different.

Image

In the 15 years above, the blue line resulted in an 11% increase in one's buying power, while the red line resulted in a 136% increase.

Those who endured were rewarded well.
Yes, but that red line stops at "today." In 6 months, or even less, that red line could be realistically back with the blue line.

Nobody knows.

But if that were the case, then at best all one who took that red-line-ride would end up with is the privilege of saying, "WOW, that was one hell of a ride! I think I'll take it again!"

And then you can stay on it, and back up we go, eventually.
But unfortunately, what goes up must come down, so hang on to your hat!
Because the ride ain't over yet!

Myself, I used to love roller coaster rides and it's been a long time since I've been on one, but if I ever get the chance to do it again, I definitely will. Not going to go out of my way for it though.

But I only like the amusement park kind, since I don't take them too seriously.
So they don't have any "real" impact on my life.
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha (a George Harrison song)
rockstar
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Re: The recent risk-adjusted returns of stocks and bonds

Post by rockstar »

dbr wrote: Sun Jul 03, 2022 7:58 pm
rockstar wrote: Sun Jul 03, 2022 7:50 pm
If the return you get on the blue line is good enough to meet your future needs, then there is no reason to take on the added risk. The bigger the future return you need the more risk you have to take on. And there is no guarantee that the risk will provide the reward.
That is exactly right. A typical case where this comes to the fore is trying to finance a retirement using the one asset allocation or the other. For example it is a pretty good estimate that if you want to finance a 4% withdrawal rate for 30 years there is pretty much no chance a 100% TBM portfolio will get you there and there is a fairly good chance a 60/40 portfolio of stock and bonds will get you there. And if the latter is tending to fall a little short, small adjustments to withdrawals will likely fix the problem.

On the other hand if you want to spend at 2% or 1% or some level where you just have way more money than you want to use, then all bonds is fine and you get the benefit of much less upset. Of course this does bring up the question of why you even care about the upset if you have far more money than you will ever use, but that is up to the person. Such a person would probably also see no value in having still more money either.
It boils down to expense expectations and inflation. Folks that retired with 25x expenses going into an 8% inflation environment are most likely spending more this year than they expected. I think, it's why TIPS and I Bonds have suddenly become so popular as topics here. The drop of BND also has a lot of people talking about individual bond ladders too. Basically, we're all learning. The big problem remains the impact after taxes.

So another way to think about AA is what expected return do you want to make. The lower the return you need. The less volatility you have to deal with.

You can guess based on starting PE where equities will be ten years from now. And you know what bonds will pay based on the YTM. You can in theory back into an expected return and adjust accordingly. But don't forget about the taxman.
Marseille07
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Re: The recent risk-adjusted returns of stocks and bonds

Post by Marseille07 »

rockstar wrote: Sun Jul 03, 2022 8:40 pm So another way to think about AA is what expected return do you want to make. The lower the return you need. The less volatility you have to deal with.
But this isn't exactly true unless you're holding cash. Bonds are volatile if 2022 taught us anything.
rockstar
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Re: The recent risk-adjusted returns of stocks and bonds

Post by rockstar »

Marseille07 wrote: Sun Jul 03, 2022 9:00 pm
rockstar wrote: Sun Jul 03, 2022 8:40 pm So another way to think about AA is what expected return do you want to make. The lower the return you need. The less volatility you have to deal with.
But this isn't exactly true unless you're holding cash. Bonds are volatile if 2022 taught us anything.
Bonds are volatile. But they're less volatile than equities. When you combine the two, you should have a less volatile portfolio.

What we have learned in 2022 is that bonds aren't necessarily always negatively correlated to equities. And YTM matters.

I like reading Bill Gross:

https://williamhgross.com/investment-archive/

I'm looking forward to reading his book.
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willthrill81
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Re: The recent risk-adjusted returns of stocks and bonds

Post by willthrill81 »

theac wrote: Sun Jul 03, 2022 8:24 pm
willthrill81 wrote: Sun Jul 03, 2022 7:52 pm
theac wrote: Sun Jul 03, 2022 7:43 pm
nisiprius wrote: Sun Jul 03, 2022 10:24 am If bonds are held for a time period that is short compared to their duration, their returns will be volatile.

When discussing the risks of stocks and bonds, I feel that the following chart is an historic fact that is useful to know.

Source

Image
I know this probably goes against what most people think about money, but for a few thousand dollars more, one way or the other, I much prefer being on the ride of that blue line, than the red line.

If someone takes a slightly deeper look at that red line, there are no doubt many sleepless nights and stressful moments when riding the red line, than those that you will experience when riding the blue line.

You can't put a price on quality of life, and stress to me is an indicator of poor quality of life. And I have to wonder how much of that profit made on the red line went to the pharmaceutical companies for antacids, sleeping pills, or whatever, and how much time does it shave off of a person's life in the long run, etc.

Thanks for the chart, reminds me why I bought a ticket on the blue line! :happy
That chart was purposefully selected with certain dates in mind. Extend it, even to the current stock bear market, and the conclusions derived may be very different.

Image

In the 15 years above, the blue line resulted in an 11% increase in one's buying power, while the red line resulted in a 136% increase.

Those who endured were rewarded well.
Yes, but that red line stops at "today." In 6 months, or even less, that red line could be realistically back with the blue line.

Nobody knows.
I don't think that a -70% decline from ATHs is very realistic, which would be necessary for stocks to come down to what bonds are, especially considering that bonds haven't been so stable for a while now. They're down -22% in real terms since July of 2020.

As others have noted, I don't think the moral of the story is 'x = bad' and 'y = good'. The real world is far more nuanced than that.
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theac
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Re: The recent risk-adjusted returns of stocks and bonds

Post by theac »

willthrill81 wrote: Sun Jul 03, 2022 9:41 pm
theac wrote: Sun Jul 03, 2022 8:24 pm
willthrill81 wrote: Sun Jul 03, 2022 7:52 pm
theac wrote: Sun Jul 03, 2022 7:43 pm
nisiprius wrote: Sun Jul 03, 2022 10:24 am If bonds are held for a time period that is short compared to their duration, their returns will be volatile.

When discussing the risks of stocks and bonds, I feel that the following chart is an historic fact that is useful to know.

Source

Image
I know this probably goes against what most people think about money, but for a few thousand dollars more, one way or the other, I much prefer being on the ride of that blue line, than the red line.

If someone takes a slightly deeper look at that red line, there are no doubt many sleepless nights and stressful moments when riding the red line, than those that you will experience when riding the blue line.

You can't put a price on quality of life, and stress to me is an indicator of poor quality of life. And I have to wonder how much of that profit made on the red line went to the pharmaceutical companies for antacids, sleeping pills, or whatever, and how much time does it shave off of a person's life in the long run, etc.

Thanks for the chart, reminds me why I bought a ticket on the blue line! :happy
That chart was purposefully selected with certain dates in mind. Extend it, even to the current stock bear market, and the conclusions derived may be very different.

Image

In the 15 years above, the blue line resulted in an 11% increase in one's buying power, while the red line resulted in a 136% increase.

Those who endured were rewarded well.
Yes, but that red line stops at "today." In 6 months, or even less, that red line could be realistically back with the blue line.

Nobody knows.
I don't think that a -70% decline from ATHs is very realistic, which would be necessary for stocks to come down to what bonds are, especially considering that bonds haven't been so stable for a while now. They're down -22% in real terms since July of 2020.

As others have noted, I don't think the moral of the story is 'x = bad' and 'y = good'. The real world is far more nuanced than that.
Sorry, I didn't look that closely at the chart, but I think you get my drift.

Ups and downs just becomes a way of life after a while,
and for some it's worth it, and for some it's not.

Some have no choice, and some do.
Each case is different, so it's all up to you. :sharebeer
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha (a George Harrison song)
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Fremdon Ferndock
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Re: The recent risk-adjusted returns of stocks and bonds

Post by Fremdon Ferndock »

Bonds have helped portfolio returns because bond returns and stock returns were inversely correlated during the worst market drawdowns over the last 50 years: 1973-74, 2000-2002, 2008. It was that feature that accounted for most, if not all, of the benefit of holding bonds rather than just having a smaller equity allocation and putting the rest in money market, CDs, and other stable investments. For example, from 1975-1999 an allocation of 60% stocks, 40% cash had a nearly identical annual return and sharpe ratio as a 50% stocks, 50% 10-year treasury allocation. We just got used to having bonds come to the rescue when stocks were in the tank. But 2022 is the first time since forever that both stocks and bonds are down together. So, actually, this time is different. Going forward, will bonds start coming to the rescue again?
"Risk is what’s left over when you think you’ve thought of everything." ~ Morgan Housel
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willthrill81
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Re: The recent risk-adjusted returns of stocks and bonds

Post by willthrill81 »

Fremdon Ferndock wrote: Mon Jul 04, 2022 9:36 am Bonds have helped portfolio returns because bond returns and stock returns were inversely correlated during the worst market drawdowns over the last 50 years: 1973-74, 2000-2002, 2008.
There were short-term benefits to returns from bonds during those periods, but over the long-term, a greater allocation to bonds has reduced returns, not helped them.
The Sensible Steward
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