Bonds have been a beneficiary of 40 years of declining inflation and interest rates. It is really hard to see how the next 40 years will work for bonds, but my guess is that it will be more like the 1960s and 1970s, which were a disaster for bonds and the investors who relied on them.
20 year constant maturity bonds using US data for the run up from 2.5% yields to 14% yields resulted in a 60% (multi-year) GAIN. Not great, but equally such yield transition wasn't good for stocks either. Following such a transition holding bonds where many were bought at relatively long maturity and high yields they rewarded handsomely. In including bonds as part of a portfolio such purchases were more inclined to actually occur, in contrast to leaving it to 'timing' (manual).
Lootman wrote:Sure, shares have big falls from time to time. But then that just makes it all the more impressive that long-term they do so well. Every time they go down, they end up going up by even more, and typically within 2 to 3 years.
... But not always. For instance one method of withdrawals during retirement (which many specifically invest for) is to draw a initial 4% and uplift that amount each year by inflation as the amount drawn in subsequent years (4% SWR). Using US data (convenience of data availability) - for all stock from a 2000 start date and a few years later and the portfolio value had halved in real terms
https://tinyurl.com/otdbften Later still, around a decade into retirement and the portfolio value was down towards 25% of its former value (-75%). But subsequently 'rebounded' to being around -60% down.
Applied to the UK index and the picture is even worse. 2020 having near just 10% of the former start date inflation adjusted portfolio remaining.
Others fared better. TJH accum with 4% SWR applied for instance is just -30% down (as of April 2000) i.e. individuals who beat the index naturally did better. However assumption of beating the index is a big assumption, there's a equal probability of lagging the index.
Much is subject to start date, early year sequence of returns risk is a big risk factor, for many that is not optional/variable, but rather is fixed. If soon after transitioning from accumulation to drawdown the stock market moves unfavourably that can have a massive effect on retirement outcome.
A simple way to massively reduce early year sequence of returns risk is to not fully load into stocks. That can even be on a non rebalanced basis such as starting with 50/50 stock/gold and just letting that run (no rebalancing), and just draw in weighting proportions (£1000 investment, stocks weight 40% at the time a £100 withdrawal is required then take £40 from stocks, £60 from gold).
https://tinyurl.com/19llyjul ... for that link, tick the 'inflation adjusted' tickbox in the chart, you might also like to click the 'Allocation Drift' tab to see how the stock and gold proportions varied over time).
Repeat that over different start-dates/dates-ranges and broadly it was safer (still with reasonable rewards) to NOT use a 100% stock asset allocation.
You have to remember that the financial sector is the worlds richest sector and is well apt at extracting other peoples money for itself. Historically stock indexes that are suggested as being representative of the historic 'average' - that are used as a sales pitch - have been repeatedly tweaked/revised. I believe the reality is that the average investor on average underperforms that average by 2%/year (and being a average some will of course have lagged by (in some cases considerably) more). Dow and Jones for instance devised three indexes but today only a revised and best performing index of the three is the one that is commonly used as a 'guide' (Dow Jones Industrial Average). Survivorship bias.
Fundamentally main Indexes are a mathematical based method, revised over time to be 'better'. Beating the index is a common desire/objective however few manage to reliably and consistently do so - typically a small number in reflection of natural probabilities.