What caught my eye this week.<\/em><\/p>\n W<\/span>as there ever a rationale way for investors with a 60\/40-style equity\/bond portfolio to avoid the worst of the government bond rout of 2022?<\/p>\n It\u2019s a question that still bothers me. As a writer and an investing blog owner, mind you, not on my own account.<\/p>\n I didn\u2019t own any bonds going into 2022 as an active investor<\/a>. I\u2019d felt gilts looked a poor risk-reward proposition for years.<\/p>\n But fret not \u2013 this isn\u2019t a brag\u2026<\/p>\n I found plenty of other ways to lose money in 2022. Indeed it was my worst showing on a relative basis in my investing lifetime.<\/p>\n However I didn\u2019t own any government bonds. Which meant at least I didn\u2019t suffer the indignity of seeing the supposedly \u2018safer\u2019 bit of a portfolio do worse than if I\u2019d gone all-in on stocks.<\/p>\n As I wrote in December 2022 in my recap<\/a> of that woeful year:<\/p>\n Vanguard\u2019s popular LifeStrategy funds<\/a> have put in a Bizarro World performance:<\/p>\n This is the opposite of what\u00a0we\u2019ve come to expect<\/a>\u00a0from balanced funds like LifeStrategy.<\/p>\n And let\u2019s be honest \u2013 it sucks.<\/p>\n<\/blockquote>\n True, the pain of 2022 has made government bonds investable again. That\u2019s a genuine upside.<\/p>\n However for anyone who owned a lot of government bonds before the rout, such a silver lining must feel a bit like when your house burns down and at least you get the chance to plan a new kitchen.<\/p>\n Whenever I reproach myself for not writing more about the risks of government bonds on very low yields, my co-blogger The Accumulator<\/em> reproaches me in turn \u2013 by reminding me we did!<\/p>\n Long-time Monevator<\/em> readers may recall such classics as:<\/p>\n Also, I did fret openly about a potential government bond crash \u2013 way back in 2015<\/a>!<\/p>\n Indeed \u2013 and even more tellingly \u2013 I first worried government bonds were getting overvalued in 2008<\/a>, when the financial crisis was still raging and safety was a first resort.<\/p>\n As things turned out, the \u2018low\u2019 yields that spooked me then \u2013 yields which at the time had not been lower since World War II \u2013 still hovered above 3%.<\/p>\n Bond yields had far lower<\/a> to go in the years ahead.<\/p>\n In fact, gilt prices continued to climb inexorably \u2013 and hence their yields fell to near-zero \u2013 until 2022, when suddenly everything reversed.<\/p>\n So precipitous was the subsequent plunge that the iShares core UK Gilts ETF<\/em> (ticker: IGLT) is still underwater compared to when I first fretted about low yields in December 2008<\/strong>!<\/p>\n IGLT is a distribution fund. Its price doesn\u2019t include the return from dividends. But even if you\u2019d reinvested your income from IGLT, the 16-year gains are puny:<\/p>\n Source: iShares<\/a><\/p>\n Over the same period a world equity tracker multiplied your money nearly six-fold. That\u2019s not so much an opportunity cost as an opportunity catastrophe \u2013 unless of course you\u2019d been prescient enough to sell your bonds in 2020.<\/p>\n But that\u2019s hindsight speaking.<\/p>\n We didn\u2019t know for sure that the world wasn\u2019t headed for another Great Depression in 2008 \u2013 or something even worse, if the ATMs had failed and all the banks went bust.<\/p>\n And even as yields fell further over the following 14 years, it still seemed futile to bet against bonds.<\/p>\n Yields would just be lower again the next year, and you\u2019d be left with egg on your face.<\/p>\n The best a strict passive investor could probably do was to reduce their government bonds to a tolerable minimum and hold more cash (and other assets<\/a>) instead.<\/p>\n But remember that for years that would have been a poor trade. The return on cash was nearly nothing. Yet bonds remained a decent investment, delivering steady returns well into the Covid era.<\/p>\n Our model Slow & Steady Passive Portfolio<\/em><\/a>, for instance, outperformed our expectations for a 60\/40 portfolio for years, in large part thanks to those relentless gains in bonds.<\/p>\n So where does all this looking back leave us as we ponder the future?<\/p>\n Well, arguably it\u2019s all moot.<\/p>\n It\u2019s one thing to say that perhaps there was a case for even a passive investing purist \u2018market timing\u2019 away from government bonds when the ten-year yield danced towards zero \u2013 and the expected returns from inflation-linked government bonds went negative.<\/p>\n But that isn\u2019t where we are now<\/a>. And there\u2019s no reason to think we\u2019ll see the like again in the next 50 years.<\/p>\n Those near non-existent bond yields were probably a special case.<\/p>\n In contrast, fiddling when the yield on the ten-year falls to 3.5% and you\u2019d bought at 4% might be the stuff of a lucrative day job on the prop desk of an investment bank.<\/p>\n But everyday investors will surely to do worse for such tinkering\u2026<\/p>\n \u2026or will they?<\/p>\n I\u2019ll conclude with some interesting research shared by Jim Paulsen<\/a> a couple of weeks ago on the U.S. flavour of a 60\/40 portfolio.<\/p>\n For his purposes, Paulsen<\/a> defines the \u2018cost\u2019 of holding a 60\/40 portfolio as being how much it would lag a 100% equity allocation over any particular period.<\/p>\n This cost \u2013 in terms of foregone returns \u2013 is the price you pay for the lower volatility and downside protection of holding government bonds, with their guaranteed return of capital and knowable returns.<\/p>\n Digging into the numbers, Paulsen found that the cost has previously soared when the yield on a ten-year US Treasury bond falls below 4%:<\/p>\n Source: Paulsen Perspectives<\/a><\/p>\n There are probably two reasons for this observation over this period.<\/p>\n Firstly is the one Paulsen focuses on. When bond yields are low, you\u2019re not getting compensated as much for owning government bonds in terms of income. On an inflation-adjusted basis, you might not be making money at all.<\/p>\n But secondly, I suspect there\u2019s an equity timing signal buried here.<\/p>\n When government bond yields are very low, it\u2019s probable people are more fearful than usual. They\u2019ve likely bought government bonds for safety, presumably in part with money that could instead be invested in shares.<\/p>\n In that case equity valuations may be depressed \u2013 implying potentially higher returns from the \u201960\u2019 part of the portfolio going forward.<\/p>\n Whatever the reason, Paulsen suggests the 4% yield level could act as a trigger for US investors to look again at their asset allocation should the ten-year US treasury yield fall below 4%.<\/p>\n Rightly he doesn\u2019t suggest wholesale abandonment of a diversified portfolio, writing<\/a>:<\/p>\n The 60\/40 balanced portfolio makes sense for many investors and there is no reason to abandon balanced management even if the 10-year Treasury yield does decline again below the 4% trigger.<\/p>\n However, 60\/40 investors may want to consider occasionally altering the balance mix depending upon which side of the Trigger they find themselves.<\/p>\n If you generally are a 60\/40 investor, perhaps you could adopt the simple rule of being 50\/50 when above the yield Trigger and switching to 70\/30 when below the yield Trigger.<\/p>\n Depending on each individuals\u2019 risk tolerance, this \u2018toggle approach\u2019 may not be appropriate.<\/p>\n But for those balance investors who may want to try and take advantage of the 4% Trigger and keep the \u2018relative cost\u2019 of balanced management reasonable, adjusting the mix slightly around the toggle may prove profitable, perhaps as soon as in 2025.<\/p>\n<\/blockquote>\n Finally I\u2019d note that Paulsen\u2019s backwards data dive only ran to 1945 (when, as I said above, bond yields were last very low) and also that this is US data, with its rip-roaring equity gains to greatly plump up the \u2018cost\u2019 side of the equation.<\/p>\n Still, food for thought. Especially if yields ever do descend into the depths again.<\/p>\n Have a great weekend.<\/p>\n The Japanese stock market crash revisited \u2013 Monevator<\/a> [Members<\/a>]<\/em><\/p>\n FIRE-side chat: contracting killer \u2013 Monevator<\/a><\/p>\n From the archive-ator: Back-up plans for living off a portfolio \u2013 Monevator<\/a><\/p>\n Note: Some links are Google search results \u2013 in PC\/desktop view click through to read the article. Try privacy\/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.<\/em><\/p>\n Vanguard UK introducing a monthly fee for smaller investors \u2013 This Is Money<\/a><\/p>\n UK economy shrinks again in October, official figures show \u2013 Sky<\/a><\/p>\n Average rent up \u00a33,240 annually since the pandemic \u2013 BBC<\/a><\/p>\n ONS says the cost of average home in England is unaffordable\u2026 \u2013 Guardian<\/a><\/p>\n \u2026while in London even the highest earners are priced out\u2026 \u2013 City AM<\/a><\/p>\n \u2026and business leaders are calling for a \u2018new town\u2019 in capital \u2013 BBC<\/a><\/p>\n Police arrest 93 gang members behind \u00a34m shoplifting spree \u2013 Sky<\/a><\/p>\n \u201cTrain phone snatcher stole \u00a321,000 from my bank apps\u201d<\/em> \u2013 BBC<\/a><\/p>\n London Stock Exchange exodus hits \u00a3107bn as Ashtead eyes US \u2013 City AM<\/a><\/p>\n Fewer US companies are demanding their staff return to the office \u2013 Sherwood<\/a><\/p>\n Hedge fund startups dwindle under fee pressure \u2013 Bloomberg via Yahoo Finance<\/a><\/p>\n What if the UK isn\u2019t actually the sick man of Europe? [Search result]<\/em> \u2013 FT<\/a><\/p>\n Related: OSR issues statement on declining quality of UK statistics \u2013 OSR<\/a><\/p>\n Whatever a \u2018strategic Bitcoin reserve\u2019 is\u2026 \u2013 Sherwood<\/a><\/p>\n \u2026no country needs one\u00a0 \u2013 Cullen Roche<\/a><\/p>\n Best bank account switching deals: make up to \u00a3180 \u2013 Which<\/a><\/p>\n Chase offers 4.75% savings rate to new customers \u2013 This Is Money<\/a><\/p>\n How to get a refund for delayed trains \u2013 Be Clever With Your Cash<\/a><\/p>\n British energy firms told to offer \u2018zero\u2019 standing charge tariff \u2013 Guardian<\/a><\/p>\n Open an account with low-cost platform InvestEngine via\u00a0our link<\/a>\u00a0and get up to \u00a350 when you invest at least \u00a3100 (T&Cs apply. Capital at risk) \u2013\u00a0InvestEngine<\/a><\/p>\n Interest-only mortgages will make up just 2% of home loans by 2034 \u2013 T.I.M.<\/a><\/p>\n Virgin Voyages just launched an annual cruise pass for\u2026 $120,000 \u2013 Sherwood<\/a><\/p>\n Six household costs rising in 2025 and how to beat them \u2013 Which<\/a><\/p>\n Crumbs! Why are mince pies so expensive this Christmas? \u2013 Guardian<\/a> [Sorry, Homes in Pictures seems to be on holiday early\u2026]<\/em><\/p>\n ISO: Patina \u2013 Money With Katie<\/a><\/p>\n Lessons from the Bogleheads 2024 University [Videos]<\/em> \u2013 The Bogle Center<\/a><\/p>\n Owning your own home linked to a longer life \u2013 University of Oxford<\/a><\/p>\n Why retail stock traders underperform \u2013 Klement on Investing<\/a><\/p>\n Pick your peril \u2013 Humble Dollar<\/a><\/p>\n \u201cWhy can\u2019t I be less anxious about money?\u201d<\/em> \u2013 Guardian<\/a><\/p>\n A defence of early retirement \u2013 Simple Living in Somerset<\/a><\/p>\n Every asset managers\u2019 2025 forecast \u2013 Behavioural Investment<\/a><\/p>\n How big is the equity risk premium? \u2013 Klement On Investing<\/a><\/p>\n The best Wall Street book of 2024 is also the least salacious \u2013 Bloomberg<\/a><\/p>\n Asset managers make existential dash into private assets \u2013 FT<\/a><\/p>\n How to spot the UK\u2019s fastest-growing companies \u2013 Trustnet<\/a><\/p>\n Direct Line: a tale of dividend cuts and takeovers \u2013 UK Dividend Stocks<\/a><\/p>\n Investors haven\u2019t been this complacent for two years \u2013 Sherwood<\/a><\/p>\n BlackRock\u2019s 2025 investment outlook is out [PDF]<\/em> \u2013 BlackRock<\/a><\/p>\n Investigating \u2018formula investing\u2019 [Research]<\/em> \u2013 SSRN<\/a><\/p>\n The problem with the Buffett indicator and others like it \u2013 Tker<\/a><\/p>\n Antifragile: Things that Gain from Disorder<\/em>\u00a0by Nassim Taleb \u2013\u00a0\u00a30.99 on Kindle<\/a><\/p>\n The Big Con [On the Consulting Industry]<\/em>\u00a0by Mariana Mazzucato \u2013\u00a0\u00a30.99 on Kindle<\/a><\/p>\n Nudge: The Final Edition<\/em>\u00a0by Richard Thaler and Cass Sunstein \u2013\u00a0\u00a30.99 on Kindle<\/a><\/p>\n How Westminster Works\u2026and Why It Doesn\u2019t<\/em>\u00a0by Ian Dunt \u2013\u00a0\u00a30.99 on Kindle<\/a><\/p>\n Defra: food insecurity rising in UK because of climate breakdown \u2013 Guardian<\/a><\/p>\n Scientists urge halt to research on risky \u2018mirror microbes\u2019 \u2013 B.A.S.<\/a><\/p>\n Cotton-and-squid-bond sponge can soak up 99.9% of microplastics \u2013 Guardian<\/a><\/p>\n Star Wars<\/em> impact on woodland to be studied \u2013 BBC<\/a><\/p>\n Plummeting used-EV prices trigger car leasing crisis \u2013 This Is Money<\/a><\/p>\n How the Amazon\u2019s \u2018Boiling River\u2019 foreshadows a warmer world \u2013 BBC<\/a><\/p>\n Cycles \u2013 Cold Eye Earth<\/a><\/p>\n The GPT era is already ending \u2013 The Atlantic<\/a><\/p>\n Great, now the machines understand us \u2013 Klement on Investing<\/a><\/p>\n Chatbot \u2018encouraged teen to kill parents over screen time limit\u2019 \u2013 BBC<\/a><\/p>\n The phoney comforts of AI skepticism \u2013 Platformer<\/a><\/p>\n \u2026and an angry retort \u2013 Marcus on AI<\/a><\/p>\n Will AI eat the browser? \u2013 Crazy Stupid Tech<\/a><\/p>\n YouTube<\/em> creators are struggling to survive on ads alone \u2013 Sherwood<\/a><\/p>\n This is why you want to make your own website \u2013 Aftermath<\/a><\/p>\n Google unveils \u2018mind-boggling\u2019 quantum computing chip \u2013 BBC<\/a><\/p>\n How Madrid built its metro cheaply [Essential reading]<\/em> \u2013 Work in Progress<\/a><\/p>\n Working the nVidia way \u2013 Dror Poleg<\/a><\/p>\n Elon Musk is building his own town in Texas \u2013 Sherwood<\/a><\/p>\n The five-minute city: inside Denmark\u2019s revolutionary neighbourhood \u2013 Guardian<\/a><\/p>\n Stay away from Dr. Google \u2013 NPR<\/a> [h\/t Abnormal Returns<\/a>]<\/em><\/p>\n The six stages of cleaning out a parent\u2019s home \u2013 Guardian<\/a><\/p>\n Assad\u2019s fall was swift. But the signs were always there \u2013 W.P. via MSN<\/a><\/p>\n Have official targets made exercise a chore? \u2013 Guardian<\/a><\/p>\n \u201cThe game is rigged, but you cannot lose if you do not play.\u201d Like these links? Subscribe<\/a> to get them every Friday. Note this article includes affiliate links, such as from Amazon<\/a> and Interactive Investor<\/a>.<\/em><\/p>\nYield to no one<\/h4>\n
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Crying wolf about bonds<\/h3>\n
A wayback machine<\/h4>\n
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<\/a><\/p>\nGood going until it wasn\u2019t<\/h4>\n
Don\u2019t fight the last war<\/h3>\n
Trigger happy<\/h3>\n
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<\/a><\/p>\nA new 4% rule\u2026<\/h4>\n
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From Monevator<\/h3>\n
News<\/h3>\n
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<\/a><\/p>\nStrategic Bitcoin reserve mini-special<\/h3>\n
Products and services<\/h3>\n
Comment and opinion<\/h3>\n
Naughty corner: Active antics<\/h3>\n
Kindle book bargains<\/h3>\n
Environmental factors<\/h3>\n
Robot overlord roundup<\/h3>\n
Hard yards on the Internet mini-special<\/h3>\n
Off our beat<\/h3>\n
And finally\u2026<\/h3>\n
\u2013 Marla Daniels, The Wire<\/em><\/a><\/p>\n