At a firm where one of our key investment principles is that “time matters”, I love a chart that show why we value it. Before I dig in though, let me say loud and clear that past performance does not guarantee future results. I use history to teach me, but I don’t count on it repeating itself.

I’ve told you before that I’m a skeptic by nature, so I’m going to start by focusing on the bottom of each range. These are the worst 1, 5, 10, and 20-year-end returns from 1950-2019. It’s the historical worst-case return.

The first thing that jumps out is that a single year downside in a diversified stock portfolio has been as bad as -39%. Got it. In a single year, it can be bad – really, really bad; however, there has historically been enough good that the 5-year worst return is much less negative at -3%. That is significantly better, but let’s be real, if I lose 3% over 5 years, I’m a little frustrated. Frankly, if I have been in the market for 10 years, and I lose 1%, I’m still frustrated.

Here’s how time matters: if I coached myself to stay steady through some of those frustrating 5 and 10 year periods, the 20-year stock portfolio would have resulted in the most beneficial range of returns for my long-term goals. A stock portfolio’s worst 20-year return over the last 69 years was positive 6% – better than a bond portfolio or a 50% bond and 50% stock portfolio. On top of that, it also had the larger upside periods.

Let’s take a step back and look at the blue bars representing a diversified bond portfolio and the grey bar representing a portfolio that is 50% stock and 50% bond. It’s clear that the bond portfolio can act as a ballast. For the end of each year over the 69-year period, a 50% bond portfolio never had a negative worst-case return in a period longer than 5 years.

If you are still tracking with me, I’m going to give you my favorite nugget from this chart. The best 10-year returns on a 50% stock 50% bond portfolio are the same as a bond portfolio, but their worst case is better! I tend to think about bonds helping to limit losses, but in the 10-year time periods, including stocks in the portfolio actually limited downside as well.

Time does matter.

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I love when a chart makes you do a double take. When a chart makes you go “Yes!” but then after another minute “Oh”.

Because municipal bond yield is usually exempt from state, local and federal taxes, investors are willing to take less yield than they would for a treasury – thus the squiggly line is under 100 most of the time.

Cue 2020. Yield from 10-year yield from municipals is now better than what we can get from a 10-year treasury.

Wait, wait, before you think you figured out how to get some steady income from municipal issued bonds, it’s worth a pause to remember the math driving the line in this chart. The 10-year treasury yield (the base of the number) has gone from well over 2% to about .70%. It doesn’t take much muni yield to create a number that will graph higher than 100.

In fact, muni yield has been on a wild ride in 2020, but has settled out at an all-time low as well. Ouch! The main advantage of buying a municipal fund is the tax savings on the yield. Unfortunately, this space is also facing significant challenges as municipalities and states struggle with revenue losses during COVID. It is unclear how badly our local governments are struggling because their fiscal year has just ended, and they don’t report for several more months.

Clearly this is a space we are watching closely.

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As US investors, it’s important to pay attention to how the international market is behaving. The panel on the left shows that US returns were stronger from 2005 to 2019, followed by EM, Europe ex-UK and then Japan.

Now let’s look at what happened when the pandemic first hit. The middle panel highlights the role international exposure could have played in your portfolio during the initial sharp market declines in the first quarter. Japan lost significantly less than the US. Emerging Markets, even with the purple drag of having to convert their returns to US dollars, lost about the same as the United States.

As the world emerged from the deep crisis, on the right-side panel, the United States is not the only place seeing the stock market recover significantly. International markets have enjoyed a significant tailwind from a weakening US dollar. Additionally, the earnings decline on the emerging market column is actually less than the United States. There are some very interesting things happening abroad that support staying globally diversified.

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I was talking with a mentor late last year, and she was telling me about this incredibly “reasonable” request from a client. He was asking for a very low risk 2% annual income from an investment that he was happy to hold for the next 15 years. I believe she said something like “I’ll take that request all day”.

This week’s chart illustrates why she felt very confident that she could deliver for this client.  She could go out the maturity ladder to around 10 years and buy US Treasury Note at the appropriate yield. She would get him a 2% annual payment with very low risk.

Had that client asked for a low risk 2% yield at the beginning of 2019, she would have had even less trouble designing a portfolio. In fact, if he had wanted to take periodic withdrawals, she could have built the portfolio with maturities that would accommodate shorter term cash flows without dipping below the 2% yield.

Even in December of 2008 when rates dropped during the Financial Crisis, she could have met his request. Short-term yield very nearly matched what it does today, but she still had options at the longer maturity dates to reach the desired 2% yield.

And then there’s today: his portfolio construction would be much more complex. No matter how far out she looks on the curve, US Treasuries are not offering a 2% annual income. To construct something now, she would be forced to ask the client to take on more risk or lower his annual income expectation to around 0.50%.

Just like my mentor, bond fund managers cannot go out and grab a low risk yield right now. At ThirtyNorth, we are staying vigilant – aware that managers may be digging into higher risk or asking us to accept lower returns. Those adjustments are likely market realities, but we want to be prepared to adjust your allocations in response.