The cost to the US government of borrowing money for a decade came within sniffing distance of 3% yesterday. When we take out gold and commodities returns from the 1970s, the best performing asset class was, surprisingly, bonds. The Federal Reserve Bank of St. Louis has measured the returns of stocks, Treasury bills, and 10-year Treasury bonds since 1928. I bought some condos in a ski area in 1975 after the bust for $25K each with some partners. This would balance out the recent higher than average high returns. by haberd Thu Apr 09, 2009 2:20 pm, Post Short term high quality worked fine. The first bull market started after World War I and lasted until after World War II. Im a bit obsessed with historical stock and bond returns. As a point of comparison, the yield on a U.S. 10-year government bond is currently 2.9%. Writer, U.S. News & World Report. And with current low interest rates, theres more room for them to rise than fall. Notice how the countries that saw their bond markets do very poorly in the first half of the 20th century saw a reversal in their fate in the second half: This illustration gives you a good feel for the government bond market. Financial educators and investment advisors frequently use the historical return data to help you figure out whatreturns to expect in the future. The bond markets were not immune as the economic turmoil dramatically heightened volatility to levels not seen since the Great Recession of 2008. Does the Stock Market Care Who the President Is. The 10 year treasury is the benchmark used to decide mortgage rates across the U.S. and is the most liquid and widely traded bond in the world. I would expect TIPS to do the opposite. The other half is related to defaults, downgrades, and early calls. If we assume that going forward the S&P 500 will return 6% on average and that the 1-year Treasury Bond will return 4.0% then we can expect the future annual return on a 60% stock and 40% fixed investment portfolio to yield approximately 5.2% annually. By learning about returns of bonds vs stocks for the last 30 years or so, youll have a barometer for the range of stock and bond returns. }(document, "script", "aweber-wjs-xs79idvq2")); If the reversion to the mean theory holds true, then over the next decade or so, we may see higher interest rates and higher bond yields. Great so do historical returns guarantee future returns? The 1970s were actually worse than the 1930s when it comes to real returns. We will then consider the impact of innovation. More importantly, you took a decent amount of risk to generate that return. More conservative investors and those that are approaching retirement will lean towards an investment portfolio with a greater percent of bond type investments. ", Federal Reserve Bank of St. Louis. A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. Knowing the average portfolio return helps you plan for the amount of growth you can expect from your investments. Mean reversion is a theory used in finance that suggests thatassetprices and historical returns eventually will revert to the long-run mean or average level of the entire dataset., ~Investopedia. One of my favorite free sources of historical returns comes from NYUs Aswath Damodaran. The risk premium built into bonds during the 1900s was much too low to compensate investors for the forthcoming turmoil. Buoyed by the Fed's swift response to inject liquidity to support the financial system, the bond market outperformed the stock market for most of 2020. Therefore, this 40 year period from 1940-1980 actually provides us with a much better historical understanding of how bonds might perform in a LOW AND RISINGinterest rate environment. My first bond fund was a GNMA unit investment trust (uit) in my IRA, bought in 1977 and again in 1978. One way it was like a fund was that there were ongoing costs paid out of earnings. Bond investors were destroyed by inflation; anyone who purchased a US government 10-year Treasury in the early 1970s earned just 5.5%, well below the rate of inflation. The S&P 500 returned over 37%, while Treasury bills, Treasury bonds and corporate bonds returned 5.49%, 23.48%, and 20.16% respectively. Prices rising on rent, food, and gas eat up a greater proportion of their budget. Here are the performance numbers for 2020: And the annual returns from 1928 to 2020: Damodaran also includes the inflation rate in his data which allows you to view real returns. Also, look at how lucky investors were in the 1980s and 1990s. Until then, retail investors, mutual funds, and foreign investors were not a big part of the bond market. Your email address will not be published. Does this mean that cash-type investment yields are poised to rise? Per FTC guidelines, Barbara Friedberg Personal Finance may be compensated by 3rd party companies that are mentioned either through advertising, reviews, affiliate programs, or otherwise. I manage portfolios for institutions and individuals at Ritholtz Wealth Management LLC. During the first three years of the decade, the stock market lost 9.03%, 11.85%, and 21.97%. The Bogleheads Wiki: a collaborative work of the Bogleheads community, Local Chapters and Bogleheads Community. And when the stock market offers poor returns youre also penalized with higher volatility. When we allocate this portfolio according to the Robbins weightings you get a 5.95% average annual return when applying the LOW AND RISING rate environment. Maybe this will hold for a year or two, but the chances are slim that the stock and bond market returns will match those of the previous decade. "Japan Government Bond 10Y. The countries that did show negative real returns were those most affected by the world wars. Now lets apply the other components. Link to calculator for 1950-1959. Long-Term Government . This Best Asset Allocation Based on Age and Risk Tolerance will give you a rubrick for choosing your investment mix. Early investors in these new securities were compensated for taking on the challenge of understanding and pricing them. Nothing worked back then. 66-82 saw ST bonds exceed inflation by about +1.2% per year*. The big reason those cash returns were so much higher in the decades leading up to 2008 is because interest rates were much higher. The average standard deviation over this period was 14.55 for the Robbins portfolio. So the portfolio he provides for readers isnt asymmetric and is likely to generate a much lower nominal return than he cites. Show Recessions. Erik Conley at ZenInvestor predicts that the stock market will average in the low single digits over the next ten years, or possibly in negative territory. 7 Unique Ways to Save Money Financial Freedom Within Reach, 5 Money Saving Tips for New College Grads, 27 Creative Ways To Make Money Fast Unique Side-Hustle Gigs, Is Blogging Dead? The graph below contrasts real government bond returns for the first and second half of the 20th century. Pros and Cons of REITs Should I Invest? I will leave my email below if you have any questions. 66-82 saw ST bonds exceed inflation by about +1.2% per year*. But it can give you a better sense of the risk involved in these asset classes since risk is much easier to predict than returns. When you take the deflation into account, real returns from 1928-1941 were actually higher while the 1969-1977 returns were negative for stocks, bonds and cash after inflation. With no changes to that percentage over time that means the amount saved would have compounded by 8.8% per year based on wage growth. ", Reuters. And let me be clear I dont mean to pick on Robbins because I see this all the time from other finance professionals who cite the 70s as a good proxy for a rising interest rate environment relative to today. Trident D-5 SLBM- "When you care enough to send the very best.". Is a 10% Return Good or Bad? With the recent rosy stock market returns, you may not remember that the stock market started the century in negative territory. With commodity prices soaring, money supply growth exploding, and government spending surging, there is a palpable fear of a return to 1970s-style inflation. U.S. corporate bonds added an average of 100 basis points above comparable government bonds during the 20th century. var js, fjs = d.getElementsByTagName(s)[0]; (Although I confess to embracing the fashions of the era, I was never a disco fan.) While bonds are less volatile with historically lower average returns. Each year he updates the annual returns for stocks (S&P 500), bonds (10 year treasuries) and cash (3-month t-bills). This was the turning point for the century's second bull market. Long-term government bond yields declined from a high of 15% in 1981 to 6% by the end of the century, leading to higher bond prices. During the worst of the two periods, 1922-23, inflation reached an unfathomable 209,000,000,000%. A 40/15 bond portfolio of long and intermediate durations generated a 2.5% return over this period. This is an important exercise to think about going forward. The bull market in bonds showed continued strength in the early 21st century, but that strength brings the future into question. Finally, continued strong demand for fixed income from the likes of pension funds will only help accelerate these trends over the next few decades. And the returns in the 1970s were impressive - up 21% annually. She has expertise in finance, investing, real estate, and world history. What is a Good Investment Return? Healthcare receivables, mutual fund fees, and student loans, for example, are just a few of the areas being developed for the ABS marketplace. Yet, thats not always the case. The Best Free Investing Tools on the Web, For disclosure information please visit: https://ritholtzwealth.com/blog-disclosures/. What Is the History of the S&P 500 Stock Index? I bought my first house in 1971 for $14K and sold it is 1981 for $50K. No one can predict future investment returns. That "1970s style" stock/bond correlation is a worry because modern portfolios are built on risk parity-like characteristics (meaning bond yields are expected to decline when stock prices decline), but current yield levels don't leave as much room for fixed income to make as much of a positive contribution to portfolios as it has in recent decades. For the most part, investing in fixed income during the past century was not an overly lucrative proposition. Investing is allocating resources, usually money, with the expectation of earning an income or profit. Green bonds are a type of bond that helps companies and governments finance environmentally friendly projects. You can find out more about our use, change your default settings, and withdraw your consent at any time with effect for the future by visiting Cookies Settings, which can also be found in the footer of the site. For example, knowing 60/40 portfolio historical returns, helps you to estimate whether youll meet your financial goals, or not. Similarly, the paltry 0.51% return of the 3-month Treasury, cash proxy has been inordinately low from 2010 through 2019.. Can we use historical returns to predict the future? Investopedia does not include all offers available in the marketplace. Instead of a search for. Once the price of gold became unpegged in 1973 it rose nearly 1,000% for the remainder of the decade. Leveraged real estate worked great in the 70s as inflation roared. Triumph of the Optimists: 101 Years Of Global Investment Returns, a 2002 book written by Elroy Dimson, Paul Marsh, and Mike Staunton, can help us review bonds in the 20th century. We attempt to provide up to date information, but it could differ from actual numbers. Inflation peaked at the end of the First and Second World Wars as a result of increased government spending during those periods. Historically, the S&P 500 generates an annual standard deviation of about 20. The projected 5.2% average annual return suggests that since recent investment growth has been above the long term averages that going forward, investment returns will be lower than average. While the bond market is different from the stock market, it should not be ignored. So theres your bond return in the period where interest rates were LOW AND RISING a whopping 2.5%. Further Reading: The 3-month U.S. Treasury bill and cash proxy had positive returns and was the least volatile asset, with the lowest average returns. I always find something interesting when perusing this data. A 40/15 bond portfolio of long and intermediate durations generated a 2.5% return over this period. Now look at the corresponding annual volatility of these return cycles: The thing that stands out is just how long some of these cycles, both good and bad, have lasted. Interested in knowing the long term performance of bond funds especially through the 1974 -75 inflation era. Image source: https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/#582a10f7cf81. So there's your bond return in the period where interest rates were LOW AND RISING - a whopping 2.5%. From 1970 through 2019, the stock market returned roughly 10.50% while cash, 10-year Treasury Bonds, and Baa corporate bonds averaged 4.58%, 6.99% and 9.18%. In countering this claim, Robbins cites the 70s as proof that the All Weather portfolio can perform well in a rising interest rate environment. The following chart shows rolling 10-year returns from 1938 through 2019 for the performance of stocks compared to bonds. Stocks returned to their dominant position during the second decade of the 21st century. Way more fun than now. Interestingly enough, the current cycle looks eerily similar to the 1942-1968 set-up. 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