rare event with stocks and bonds both highly negative

[mistymoney]

https://forum.mrmoneymustache.com/welcome-to-the-forum/did-the-great-resignation-class-of-21-22-just-pick-the-worst-time-to-retire/?action=dlattach;attach=82153;image


@EscapeVelocity2020 shared a graphic showing very few years with this config, and the other years in that class were not good years to pull the plug.

So, from the investor perspective, what do you all make of this? (consensus - not good! maybe excepting early accumulators....., but looking for something a little more detailed, your take on the tea leaves, etc.)

following that, what would be your advice to those looking to retire now, or in the next few years? If in fact you do think the circumstances are somewhat unique and with the pential to be in the general 5% fail of the 4% approach.

The only thing I can think of is treasuries. But the interest rates - aside from ibonds - is not equal to inflation. But getting close to 4% so that is not entirely bad.

I guess the optimist would just say keep plowing as much as you can into your usual equities/bonds allocation and that should fix it. But if you don't have enough time left on your plan to really make a difference with additional seed money, what investing/saving options would you consider?

OMY not withstanding. That of course is the easy and obvious one. But besides that!

[PDXTabs]

Stocks and bonds moving together is not a rare event.


https://www.schroders.com/en/us/insurance/insights/equities/what-drives-the-equity-bond-correlation/

[mistymoney]

Stocks and bonds moving together is not a rare event.


https://www.schroders.com/en/us/insurance/insights/equities/what-drives-the-equity-bond-correlation/

According to the graphic escapevelocity had, stocks and bonds being both positive is very frequent in the data set, both negative, there were only 3 data points.

[Radagast]

I agree with PDXTabs. I posted this a little while ago. It is not new that stocks and bonds are often positively correlated. Investing books from the 1990s had to look back decades to find a reason to own bonds, and the 2000-2020 period were fairly unusual.

The top DuckDuckGo result contained this
https://www.grahamcapital.com/Equity-Bond%20Correlation_Graham%20Research_2017.pdf

Further, from the Simba Spreadsheet, years stocks and bonds both went down include more than that. I don't know what the source was for EscapeVelocity's pic, but it seems to be wrong. It isn't that much work to see that VTSAX and VBTLX were both negative in 2018 and 2021 as well.

Even more so, who cares? Nominally, stocks have been positive over 12-month periods something like 57% of the time while bonds are almost always positive. It happens and it is rare. It is too late to do anything about what has already happened, you need to invest for the future.
https://www.bogleheads.org/forum/viewtopic.php?p=6506086#p6506086

[mistymoney]

I agree with PDXTabs. I posted this a little while ago. It is not new that stocks and bonds are often positively correlated. Investing books from the 1990s had to look back decades to find a reason to own bonds, and the 2000-2020 period were fairly unusual.

The top DuckDuckGo result contained this
https://www.grahamcapital.com/Equity-Bond%20Correlation_Graham%20Research_2017.pdf

Further, from the Simba Spreadsheet, years stocks and bonds both went down include more than that. I don't know what the source was for EscapeVelocity's pic, but it seems to be wrong. It isn't that much work to see that VTSAX and VBTLX were both negative in 2018 and 2021 as well.

Even more so, who cares? Nominally, stocks have been positive over 12-month periods something like 57% of the time while bonds are almost always positive. It happens and it is rare. It is too late to do anything about what has already happened, you need to invest for the future.
https://www.bogleheads.org/forum/viewtopic.php?p=6506086#p6506086

I'm just going off the data that escapevelocity posted, but I do think there are some signals crossed here in this thread regarding the topic. It is neither a positive or negative correlation between stocks and bonds that is the data at issue, and agree that data shows both occur with some regularity.

It is the occurence of both stocks and bonds producing negative returns that the graphic escapevelocity showed being a rare event. This would be a positive correlation between the two. The other side of the positive correlation would be both showing positive returns, which is the majority of years eyeballing the data looks like greater than 50% of years have both in the positive. I'd say about 60-65% of years, but not going to count the dots on that!

Negative returns for both stocks and bonds show only 3 occurences in the past 100 years, one of those being 2022. The other years were those that modeling frequently shows fails on the 4% WR.

[EscapeVelocity2020]

I did a little Google sleuthing and here is the origin of this chart -



As Mistymoney says, the issue is not whether stocks and bond returns are correlated, it is that we are currently experiencing one of the worst combinations of negative bond and stock returns.  2022 obviously isn't finished, but it's a good time to take inventory of where we are at.

Edit to add - if you want to manually check his work, here is one source of data you could use - https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

2021 was most definitely not a negative year for S&P500 returns.  For 2018, US Treasuries were -0.02% S&P500 was -4.23%, quite likely on the chart.  1931 and 1969 match up, 1941 returns also both negative, but that year might not be counted the same as other years...

[Radagast]

True, in nominal terms bonds have been positive like 90% of the the time over a calendar year, while stocks have been positive like 57%. On average they have had little correlation, so it follows that 4% of all years they would have gone down together, 50% both up, 40% stocks down bonds up, 6% stocks up bonds down. I would say that 2022 has been entirely within the expected range. It's a good time to be buying, I personally hope the losses in both continue and/or stay down a couple years. I have five years or less left to FI, it would be nice to get my money's worth for my investments.

[mistymoney]

True, in nominal terms bonds have been positive like 90% of the the time over a calendar year, while stocks have been positive like 57%. On average they have had little correlation, so it follows that 4% of all years they would have gone down together, 50% both up, 40% stocks down bonds up, 6% stocks up bonds down. I would say that 2022 has been entirely within the expected range. It's a good time to be buying, I personally hope the losses in both continue and/or stay down a couple years. I have five years or less left to FI, it would be nice to get my money's worth for my investments.

lol, well that is honest anyway!

But if this event pans out like the 70s.....your 5 years or less to FI may turn into 10 or more....

[Radagast]

True, in nominal terms bonds have been positive like 90% of the the time over a calendar year, while stocks have been positive like 57%. On average they have had little correlation, so it follows that 4% of all years they would have gone down together, 50% both up, 40% stocks down bonds up, 6% stocks up bonds down. I would say that 2022 has been entirely within the expected range. It's a good time to be buying, I personally hope the losses in both continue and/or stay down a couple years. I have five years or less left to FI, it would be nice to get my money's worth for my investments.

lol, well that is honest anyway!

But if this event pans out like the 70s.....your 5 years or less to FI may turn into 10 or more....

Why? For example 1982, after 15 years of financial devastation, was the best year in history to FI, with a safe withdrawal rate over 9%. The reality is that low trailing returns have historically improved the odds of success. Conversely, historically FIRE at the end of a long period of great returns has been more dubious. Valuations are still such that I would use the 4% rule, but if valuations improve I would be comfortable with a higher percent. Of course the danger is that 2022 is analogous to 1968, where the past couples years weren't great, but the valuation crash still has another decade and more to run. Still, a 4% SWR would have been easily had by 1972, which is the length of my horizon. Please please please sign me up for 5%+ on 30-year treasuries.

[vand]

Stocks and bonds moving together is not a rare event.


https://www.schroders.com/en/us/insurance/insights/equities/what-drives-the-equity-bond-correlation/

It is extremely rare, though, for them both to crash at the same time. The supposedly balanced 60/40 portfolio is having its worst year in a decade century as both sides of the seasaw go down.

https://www.cnbc.com/2022/10/03/why-60/40-portfolio-is-on-track-for-its-worst-year-ever-says-cio.html


Five worst years for US stocks and bonds 60/40 last 100 years:

NOMINAL
1931:  -31%
1937:  -22%
*2022: -20%
2008: -17%
1974:  -15%
1930: -14%
DD: -64%

REAL
*2022:-26%
1974: -25%
1937: -24%
1931: -24%
1946: -20%
2008: -18%
DD: -54%

(Sept-29)

I'm never quite sure what they use for the bond allocation in these sort of numbers, I guess US10y is the standard, but if you had been long term treasuries as undoubtedly many have then your losses would be even worse

Would be interesting to see what the best least worst portfolio mixes were in 2022 from the sleuth that they have on Portfoliocharts. I would be surprised in any of them stood out in particular.

[mistymoney]

True, in nominal terms bonds have been positive like 90% of the the time over a calendar year, while stocks have been positive like 57%. On average they have had little correlation, so it follows that 4% of all years they would have gone down together, 50% both up, 40% stocks down bonds up, 6% stocks up bonds down. I would say that 2022 has been entirely within the expected range. It's a good time to be buying, I personally hope the losses in both continue and/or stay down a couple years. I have five years or less left to FI, it would be nice to get my money's worth for my investments.

lol, well that is honest anyway!

But if this event pans out like the 70s.....your 5 years or less to FI may turn into 10 or more....

Why? For example 1982, after 15 years of financial devastation, was the best year in history to FI, with a safe withdrawal rate over 9%. The reality is that low trailing returns have historically improved the odds of success. Conversely, historically FIRE at the end of a long period of great returns has been more dubious. Valuations are still such that I would use the 4% rule, but if valuations improve I would be comfortable with a higher percent. Of course the danger is that 2022 is analogous to 1968, where the past couples years weren't great, but the valuation crash still has another decade and more to run. Still, a 4% SWR would have been easily had by 1972, which is the length of my horizon. Please please please sign me up for 5%+ on 30-year treasuries.

so - I feel like you answered your own why here....

[Radagast]

But it didn't just end at a 9% SWR in isolation. Before that were 8 and 7 and 6 and 5. Admittedly within 5 years is getting into the sequence of returns zone, but ending on five down years is as least as good as ending on 5 up years. It would at most turn 5 MY into 6 MY.