The Lost Century in Bonds

by | Aug 29, 2024 | Blog, Investment Concepts

While Treasury bonds appear to offer safety, their real return tells a different story. Despite their nominal stability, investors in Treasury bonds have experienced essentially zero real after-tax returns over the past century. This highlights the critical importance of considering inflation and taxes in long-term investment strategies, as well as exploring alternative asset classes that are more likely to increase the purchasing power investors will need in the future.

While historical returns reveal that the drawdowns—defined as the most an investment has lost from its peak—tend to be small in nominal terms, when considering real returns (after inflation) and the impact of taxes, the picture changes dramatically.

 

Source: Aptus, Shiller as of 06.30.2024

 

The result of this eight-decade period is striking: Treasury bonds have essentially earned nothing in real, after-tax terms over the last century.

 

Source: Aptus, Shiller as of 06.30.2024

 

The culprit? Inflation and taxes.

While Treasury bonds have provided relatively consistent nominal gains (setting aside the recent 20% drawdown as rates moved higher from record lows), these gains have been steadily eroded by inflation, which has reduced the purchasing power of the returns. Additionally, the nominal income from these bonds is taxed at short-term rates (assumed to be 33% in this analysis), further diminishing the actual returns investors receive.

In contrast, an investment in equities during this same period would have grown $1 to nearly $500 after accounting for inflation and taxes, thanks to their 1) higher returns and 2) more favorable tax treatment, including lower long-term capital gains tax rates and the ability to defer most taxes until the equity position is sold (see post Snowballing Returns: The Hidden Magic of ETFs).

 

Source: Aptus, Shiller as of 06.30.2024

 

This reality challenges the notion of Treasury bonds as a low-risk asset and highlights the importance of a more nuanced approach to asset allocation that accounts for the long-term effects of inflation and taxes.

 

 

Disclosures

 

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance.  This information should not be construed as investment, legal, and/or tax advice. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2408-26.

Explore the Aptus Blog

Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198.

Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama.

The opinions expressed herein are those of Aptus Capital Advisors (“Aptus”) and/or the individual Aptus Employee being interviewed as of the date of publication and are subject to change without notice. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs and there is no guarantee that such assessments of investments will be accurate. There is no guarantee that strategies or recommendations will equal or exceed any expectations or goals discussed. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not take into account specific client investment objectives.

The opinions expressed herein are those of Aptus Capital Advisors (“Aptus”) and are subject to change without notice.

Aptus social media posts, including third party material, are provided for information purposes only and should not be considered investment advice or recommendation to purchase or sell any particular security, product or service. Aptus posts are based on data obtained from sources believed to be reliable but are not guaranteed as being accurate and do not purport to be a complete summary of the available data. Past performance is no guarantee of future results.

Aptus does not endorse or take responsibility for any content, advertising, products, advice, opinions, recommendations, or other materials posted by followers or other third parties on Aptus’ social media sites. Any comments or opinions posted by another user should be attributed to that user and not Aptus.

Aptus is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aptus including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available at www.aptuscapitaladvisors.com or by calling 251.517.7198.

Enhancing Outcomes

Your job is to help clients meet their goals. Part of that is capturing the compounding power of markets, part is making sure the path matches client expectations. How portfolios get from point A to point B matters.