This post is one of a series looking at returns in the decade after the financial crisis.

The ‘inevitable’ bond crash has been a recurring theme of the last ten years. Hysterical commentators periodically warn of Bondmageddon. Many investors were scared out of high quality bonds altogether – because interest rates had to rise.

Even Monevator wrote about the risks several times…

…but not nearly as often as some of you commenting on this website told us we were irresponsible for still recommending diversified portfolios that including ‘sure losers’ like bonds…

After all, the expected returns for bonds hovered around zero a decade ago, whereas the average historical real return has been about 1.5%.

What did that tell you?

Absolutely nothing as it turned out. As usual, Trustnet provides the chart that tells our story:1

UK bond returns 2009 - 2019

N.B. Vanguard’s UK Investment Grade Bond tracker contains about 70% corporate bonds.

The annualised returns for the last 10 years proved to be:

  • Index-linked Gilts2: 8.2% (5.3% real) – purple line B
  • Investment grade bonds: 6.5% (3.5% real) – magenta line D
  • Intermediate Gilts: 5.6% (2.6% real) – lime line C

Trustnet doesn’t have 10-year data yet for a pure corporate bonds tracker, a long gilts tracker, or a hedged global bonds tracker. However Vanguard’s long gilts fund is outperforming its intermediate equivalent by 9.6% vs 5.9% over five years.

So while bonds have underperformed a World equity fund’s 12.1% return over the period – just as you’d expect – they’ve exceeded their historical average tally, whilst performing their allotted role as a portfolio stabiliser and diversifier.

Anyone who dumped bonds for equities didn’t lose out, sure. But they did take on a ton of risk that wasn’t guaranteed to pay off like it has.

Things could have gone differently, and historically it often has. Luck trumps judgement until it doesn’t.

The beauty of simplicity

Indeed the last ten years have been an adventure in humility. For all my tilts towards factors and emerging markets, I’d have been better off sticking with a single total world portfolio as recommended by Lars Kroijer.

Only a foolhardy UK investor would have banked everything on the US market with its rich valuations, but its returns over the decade are surely why there are so many perky American FIRE bloggers around. There may be fewer following in their footsteps if the market mean reverts.

I was close to going into commodities but ultimately heeded the warnings – especially from Bernstein and Ferri – that the case was built on a recent period of outperformance, and that the available investment vehicles were questionable.

“Don’t invest in what you don’t fully understand” saved the day there.

The results for sector investing and megatrends proved to be a total crapshoot and I’m glad I stayed out of it. Stories are catnip for humans. If you see a product that looks like it sprang from a marketing department or a media agency (AI, robotics, big data, cannabis and blockchain ETFs all come to mind) then watch out.

The last decade of bond returns are the most instructive of all. Nothing seemed so certain as losses for that asset class and yet it just hasn’t happened.

That doesn’t mean I’m rushing into long bonds but I am upping my exposure to gilts in line with my changing risk profile.

Yes, they’re expensive but no other asset class can do the same job.

Take it steady,

The Accumulator

This is the last of our 10-year retrospectives, but you can still read the others to see how other passive-friendly strategies fared over the decade. Let’s meet here again in 2029!

  1. Trustnet provides annualised and cumulative return data for periods of up to 10 years. The results below are quoted in nominal £ returns, with dividends reinvested from 14th September 2009 to 13th September 2019.
  2. Gilts are another name for UK Government bonds.

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