There is an epic bear market happening, and I bet you don’t even know about it.
The S&P 500? Nope.
Emerging markets? Uh-uh.
An asset class supposedly much safer than either of those. US Treasury bonds.
Since August 2020, the US Long-Term Treasury Bond Index has declined by 37.7%, and after accounting for inflation, the decline is even more pronounced at -49.7%. Can you believe it’s as bad for long-term bonds as it was for the S&P 500 in 2008? This decline has erased years of modest gains; you’re down almost 19%, or -1.3% per year after inflation, if you bought US Long-Term Treasuries 17 years ago in 2009. That is a shocking long-term loss. For many, but not for us.
For most of my career, Long-Term Treasury Bonds were all the rage amongst jittery investors. During the bear markets of 2000-2002, 2008, and even 2011, when the US credit rating was in doubt, interest rates dropped, and prices of Treasury bonds soared. The longer the maturity, the bigger the bump. They were the best “hedge” against stock market declines that existed.
I was never on the bandwagon. I don’t make investment decisions based on 10 or even 20-year periods. In life, of course, a decade or two is an eternity. But in investing, it’s the blink of an eye. And that’s what this article is actually about—not long-term bonds, but investing history. It’s more important than people give it credit for.
Long-term bonds have a much more checkered past than what we saw from the 1980s to the 2010s. Interest rates rose substantially from the late 1960s to the early 1980s as inflation skyrocketed. From 1966 to 1981, long-term bonds lost 50% of their value after inflation. It’s said that history doesn’t repeat but tends to rhyme; investing history both rhymes and repeats. In fact, from 1926 to 1981, spanning more than two investor lifetimes, US Long-Term Treasury Bonds had a zero return after inflation. Zero. The bond bull market that began in the mid-1980s was due to long-term rates dropping from 15% to 1% and long-bond prices rising accordingly. To reach 15%, however, rates had to increase from 4% in the mid 1960s. Over a complete interest rate cycle (not just a period where rates rise or fall), it was always clear to me that long-term bonds were not worth the risk—twice the volatility of shorter-term bonds with no additional return.
The 2000-2019 period where long-term bonds went straight up when stocks went down? An obvious anomaly for students of investing history. From 1926 to 1999, when the S&P 500 had a negative month, the US Long-Term Treasury Index was also negative on average (short-term bond returns were positive). Since 2021, this positive stock/long-term bond correlation has returned. So much for the ultimate hedge. A broken clock is right twice a day, and even a bad investment can do well a few decades a century. Doesn’t mean we should own it.
History and some common sense, which suggest that we shouldn’t take a lot of risk in the relatively “safe” part of a portfolio for those who want it, helped us avoid long-term bonds and the carnage that has befallen them.
Enough about bonds, but let’s not let go of history just yet.
Stock History
We know stocks should have higher returns than bonds. Stocks, after all, are an ownership stake in a public company; bonds are simply loans, often made by the same corporation, to fund a company’s ongoing, profitable ventures. What company with half a brain would borrow at a higher interest rate than it expects to earn by deploying the loan proceeds in growing the company? Not one that will be around very long.
But higher stock returns aren’t a free lunch, they’re fair compensation for stocks greater volatility and short-term losses. So when our stocks have a down quarter or a disappointing year, we don’t have to worry that the sky is falling. We didn’t panic, thinking all hope was lost and our investment plans ruined, when stocks started off the month of April with a double-digit decline. We know from history that this is a common occurrence. Stock declines are necessary, usually short-lived, and part of the path to achieving +10% expected returns.
Small Value History
The same applies to smaller stocks and lower-priced value stocks. These companies are not as financially healthy as bigger, higher-priced growth companies. No one would buy their shares if they only thought they could get the same returns as from bigger, blue-chip companies. History teaches us that US small value stocks have been rewarded with returns of +13% per year, compared to just +10% for the S&P 500, because they’re riskier. For investors, stock portfolios tilted to small value stocks represent the best and only way I know of to earn a higher expected return than the market. Picking individual stocks? Timing the market? Historical evidence tells us these don’t work.
As with the stocks in volatile times, we don’t give up on small value companies after a decade of “only” 7-8% returns, despite large growth stocks doing twice as well. Is it OK to be disappointed? Sure. But we know decades of single-digit gains or lower, as well as relative underperformance, are part of the historical record. Just as some decades see 20%+ gains, it’s part of the path to +13% expected returns.
International Stock History
The US economy, and therefore the US market, has been and remains exceptional. No serious person can dispute that. But there are also good companies outside the US, in other capitalist-based, developed market economies in Europe and Asia. It makes sense that the US wouldn’t have cornered the market on capitalism and great businesses, and history and historical returns bear this out. Until recently, dating back to 1970, the S&P 500 and the MSCI World ex-US Index had identical long-term returns, but leadership cycles shifted randomly back and forth.
Diversifying globally still makes sense; the returns of similar companies in similar countries should have similar returns over time, but I always expect short-term under- and outperformance. The cycles can seem painfully long, but I’m not about to make the mistake with foreign stocks that we avoided with long-term bonds. If the only global investing history I knew of or believed in were from 2010 to 2024, an all-US portfolio would look like a no-brainer. But I also know that during the 2000-2009 “lost decade,” the S&P 500 lost value while international stocks managed gains (and international value and small value had significant, double-digit gains!). I also know that from 1970 to 1989, international stocks outperformed US stocks by a wide margin. Am I so sure that can’t or won’t happen again? I’m not betting against history. And it looks like I won’t have to—international stocks are on fire this year, erasing years of frustration.
“So we’re just going by history?” Not quite. I design portfolios for clients based on a clear understanding of their long-term goals and the long-term risks they’ll face along the way. We start with a general philosophy on investing—that markets are efficient and tough to outguess, that diversification is a good way to reduce uncertainty, that keeping fees and taxes low puts more money in your pocket, staying disciplined is difficult but essential, and that holding a small number of core investments is more efficient to manage and easier for you to understand and have confidence in. However, we also look to history—the last 100 years, where possible—to understand and evaluate the returns of different stock and bond asset classes and, just as importantly, to determine what we should expect in terms of gains, losses, and relative returns along the way.
Can you have a great investing experience without knowing your investment history? I wouldn’t want to find out.
DISCLOSURE & RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
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May 2025 Asset Class Update
All stock asset classes had strong returns in May. Diversified portfolios are back to positive for the year, with the standout performance coming from international stocks for the first time in several years. Despite a significant gain in May, US small value stocks have been the worst recent performing asset class. Some investors get frustrated with such divergent returns; to me, it’s a reminder that we’re well diversified. I don’t expect all of our holdings to go up, or down, at the same time.
Asset class mixes and individual mutual funds are for illustrative purposes and not intended to be an exhaustive list of all, or even any of the portfolio allocations or funds of Servo clients. Portfolio mixes are rebalanced quarterly and are gross of Servo advisory fees of 1% annually.