I remain endlessly amazed by how traditional investors continue to cling to outdated assumptions and clichés. Just last week, another firm once again refused to honor a client’s strong desire to expand their limited mix of just two asset classes. For tactical reasons, I’ll refrain from sharing the usual fallacies used to justify this.
Setting aside the fact that since 2022 you’ve been heavily underwater—even in nominal terms—there’s one return factor in the bond market that is structurally overlooked: inflation.
I admit, it also took me quite a while to let go of nominal return thinking. But ever since I started incorporating the eroding effects of inflation into almost all of my analyses—even if just in the back of my mind—the world really does look quite different.
The consequences of investments that have provided no protection against inflation for years are appalling. What we’ve seen in recent years is extreme in size, but also merely an acceleration of a process that’s been unfolding for over thirty years.
In an effort to convince every investor to look beyond just stocks and bonds, I present the chart below. It shows the ten-year rolling return on US government bonds, expressed after deducting inflation.
By using a ten-year horizon, you sidestep the (overly simplistic) critique that the post-pandemic period was an exception, that inflation was unusually high, and so on. By adjusting returns for inflation, you get a clear picture of how an investment performs in terms of what it’s actually meant to do: increase purchasing power—real wealth.
If this isn’t a trend
If you don’t see a multi-decade trend in this chart, I don’t know what to tell you. In the early 1980s, then-Fed Chair Volcker hiked interest rates to 20 percent. Since then, the rolling ten-year return on bonds has been declining and has now turned deeply negative.
Considering that fund managers in the investment world are expected to explain underperformance after just two or three years, it’s outright ridiculous that so few traditional asset managers ever attempt to build a better portfolio mix. To be clear: private equity and private debt are not automatically improvements. They’re still called “equity” and “debt” for a reason, and their promises rely heavily on statistical sleights of hand.
Of course, since no one has a crystal ball, one can always argue that bonds will once again deliver solid returns, or stubbornly stick to the totally outdated 60-40 ideology, or point out that other asset classes lack cash flows, or toss out a slew of other tired investing platitudes.
But the fact remains: there is a total mismatch between the minimal effort asset managers have made to escape a 30-plus-year trend and the consequences of their failure to do so.
Whose interests are being served?
How much purchasing power have investors lost over the past decades thanks to the unbreakable mold that continues to be served up to them?
Sadly, the financial industry is saturated with stories about sustainable investing and whether or not to index, while (as becomes clear from even a brief visit to this website) decision-makers seem mostly preoccupied with handing each other attractive jobs.
The question of whether the foundation of an investment portfolio is still fit for today’s world is rarely, if ever, addressed. That’s more than concerning.
Jeroen Blokland analyzes striking, current financial and macroeconomic charts in his newsletter The Market Routine. He also manages the Blokland Smart Multi-Asset Fund, which invests in stocks, gold, and bitcoin.