Stocktake: Bond market droughts can last for decades

Stocks have been the best investment over the last century, but Credit Suisse’s latest Global Investment Returns Yearbook notes equities sometimes go nowhere for decades. Risk-averse investors might think: maybe stick to bonds?

Maybe not. The odds of a “substantial and protracted negative real return” have been even greater in the bond market, the yearbook notes. All but one developed market (Switzerland) has experienced periods of 50 years or more where bonds failed to achieve a real return. The longest such period in the United States was 57 years – still less than the United Kingdom (82 years) and Ireland (88). You would have had to wait more than a century in eight countries, including France, Italy, Germany and Japan.

Spoiled

Bond investors have been spoiled over the last 40 years. During this golden era, bonds generated annualised real returns of 6.2 per cent, almost as good as equities. Additionally, bonds did well when stocks swooned. As a result, a 50:50 equity/bond portfolio was never down as much as 20 per cent over that period.

Today, stocks are expensive, but bonds are even pricier. State Street Global Advisors last week cautioned bonds would not provide the “trinity of income, return and diversification to equities it has in the past” and that’s echoed by the yearbook, which expects long-term bond returns to lag inflation.

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For investors, the yearbook’s conclusion is stark: there “is a price to be paid for the safety of government bonds” and a “high chance of disappointment.”