Introduction
In December 2023, we wrote a blog (Death by a thousand cuts - when portfolios go sideways) examining the lacklustre performance of typical investment portfolios over the preceding three years. These portfolios typically comprise a mix of bonds and shares (equities), and while equities performed well in 2024, returning around 19-20% on a global basis, bond returns have remained relatively muted. As with the previous blog, we look back in history to put recent returns in context and attempt to identify the impact on our client's retirement portfolios.
Our benchmark
Bond funds come in many different flavours, with different credit quality and duration. For our analysis, we will use the Bloomberg Global Aggregate Index, which contains around 14,000 investment-grade bonds. We also used this index in our study of the "No-Brainer" portfolio.
How bad was it?
The returns for our benchmark index were broadly flat for the five years to the end of November 2024.
This is probably not as bad as many might have feared/perceived. There are probably a couple of reasons for this:
Some bond indices fared much worse than our benchmark. Holders of some UK longer-duration bond indices saw falls of over 40% in 2022 alone.
Bloomberg UK Government Inflation Linked 15+ Year Bond Index performance over the last five years.
Our benchmark index returns are not adjusted for inflation. Inflation peaked at 11.1% in October 2022. While this inflation was relatively short-lived and insignificant compared to historical periods such as the 1970s, it still impacted our benchmark index's real (adjusted for inflation) returns, which fell around 20%.
Bloomberg Global Aggregate Index performance over the last five years (real)
How does this compare to previous historical events?
Looking back in history
To put things in context, we will construct a portfolio of 100% bonds with no fees or withdrawals in Timeline
Nominal returns
The median historical return (we have over a century of historical market data available to analyse) is around 31% (£1m starting value, £1.31m after five years) in nominal terms when measured over five years. These returns are far better than the broadly flat returns of our benchmark index over the last five years.
If we look at less favourable outcomes, there have been seven times over a rolling five-year period when bond returns have been negative. For example, the five years from 1917-1922 showed a loss of 12%. The most recent of these negative returns was in 1933, when bonds fell around 2%.
Real returns
If we look at inflation-adjusted returns, the median return is around 11%.
Eight occasions over the last century saw real bond returns over five years worse than the -20% we saw above, with 1916 showing falls of around 54%! The last time we saw worse falls was in 1977, when global bonds returned -41%.
Real-world portfolio (50% equity/50% bonds)
It's unlikely (we hope!) that many people hold a portfolio of 100% bonds in their retirement portfolio. We suggest a more representative retirement portfolio contains a mix of equities and bonds. We will now consider a portfolio of 50% global equities (using the FTSE Global All Cap, as we also did for the No Brainer analysis) and 50% bonds.
Nominal returns
This portfolio returned around 34% over the last five years in nominal terms.
As before, we will use Timeline to look back in history.
The median historical return is 47%.
There were 29 occasions over the last century where our 50/50 portfolio returned less than 34% over five years, with 1917 showing falls of around 11%. 2008 was the last time we saw a return worse than 34% over five years, with a return of 22%.
Real returns
The returns for our 50/50 portfolio are around 7% over the last five years when adjusted for inflation.
The median historical return is 26%
There were 21 occasions where the returns over 5 years were worse than the 7% our 50/50 portfolio returned. Over five years, starting in 1916, the falls were around 49%! Again, 2008 was the last time we saw a worse return than 7% over five years. 4% in this scenario.
Conclusion
A summary of the above analysis is shown below.
Things would have been bleak if your retirement portfolio had been invested 100% in bonds over the last five years. Bonds have underperformed the median historical return by over 30%, both nominally and in real terms. However, the fact that we have had worse periods during the last century should mean that the last five years shouldn't have come as a surprise, even if they were painful. Abraham Okusanya, the founder and CEO of Timeline, makes the same point.
"Another takeaway from the past year is that your point of reference matters. If your investment thesis is based entirely on the last 20 or even 40 years, you probably got a nasty surprise. If you base your thesis on a 100+ years however, the returns of 2022 fits into the range of outcomes within that dataset."
As we mentioned above, we'd consider it suboptimal to hold 100% bonds (or 100% equities!) in a retirement portfolio, and looking at the scenarios for a 50/50 portfolio, things are nowhere near as bleak. While the 5-year return still underperformed the median, there have been many periods in history when things have been worse, 2008 was one of those.
It can be easy to consider abandoning an asset class after a poor series of returns, and we are continuously surprised by how many retail investors have abandoned bonds altogether, choosing to instead invest in what is working now. This usually ends in a suboptimal outcome, but it may be "different this time" (although the evidence suggests it probably won't)!
As always, our advice remains to stick with the plan and invest in what has always worked.
About us
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide financial advice on pensions, investments, and inheritance tax.
Our office telephone number is 01932 645150.
Our office address is No 5, The Heights, Weybridge KT13 0NY.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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