Beyond the Noise: Markets, Investing, and the Bigger Picture
Conversations between Josh Renfro and Max Clark of the Fox Alliance that cut through the financial headlines to focus on the market trends, economic shifts, and investment themes that truly matter.
Beyond the Noise: Markets, Investing, and the Bigger Picture
The Death of the 60/40 Portfolio - Part 1
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For decades, the 60/40 portfolio has been considered the gold standard of investing. But what if its remarkable success wasn't the result of timeless investing principles, but rather a once in a generation economic environment?
In this episode of Beyond the Noise, Max Clark and Josh Renfro begin a new series exploring why they believe the traditional 60/40 portfolio is no longer equipped for today's market. They unpack the "40-year miracle" that fueled one of the greatest investing periods in history, explain how falling interest rates created an extraordinary tailwind for bonds, and examine why many investors may be relying on assumptions that no longer hold true.
Rather than focusing on predictions, this conversation explores the historical forces that shaped portfolio performance, and why understanding that history may be essential for making better investment decisions in the years ahead. Whether you're a long-term investor, nearing retirement, or simply trying to make sense of today's changing market environment, this episode offers a fresh perspective on one of investing's most widely accepted strategies.
Is the 60/40 Portfolio Dead?
SPEAKER_02We believe that the 6040 portfolio that has been the cornerstone of investment philosophy for the last 50 years, it's broken and dead.
SPEAKER_01From 1980 to 2020, the 6040 portfolio had an amazing return of 10.2% per year.
SPEAKER_02Yeah, it became popular because it worked.
SPEAKER_01It worked. It was effective. It was during that 40-year period. And if you really think about it, literally, we got to the almost the absolute best case possible scenario that Bond could ever have. Because interest rates really can't go lower than zero. I don't think anybody, nobody has a percent. It's a half a percent. That thought doesn't even cross people's minds. It's a perfect 40-year miracle. It is for Bonds. The average person has no idea. Just a an incredible set of circumstances that I really doubt we will see again in our lifetime.
SPEAKER_02Welcome back to the Beyond the Noise podcast. My name is Max Clark. I'm one of the senior wealth advisors and a partner here at the Fox Alliance. I'm joined by Josh Renfro, a CIO and managing partner at the firm. And we're excited to be starting a series about the death of the 6040. We believe that the 6040 portfolio, that has really been the cornerstone of investment philosophy for the last 50 years, is not equipped. It's broken and dead in this environment, in this new era that we're in today. And we're going to spend the next several episodes talking about the history of the 6040, uh, talking about what it is, how it kind of became the foundation of investment philosophy today, and why we believe it is not equipped for the era that we are in uh today. So let's kick that off here. In our first episode, we're gonna cover a little bit of the history and then get into some details about how bonds have done well. Um, but and we'll go into stocks and other topics uh in future episodes. But let's start out by talking a little bit about the history of the 6040 and probably
The Investing Strategy Everyone Knows
SPEAKER_02initially what it is. Yeah. So when we talk about the 6040, we're talking about what a lot of our listeners have probably heard and may even be using in their own portfolios, which is diversifying your portfolio by putting 60% of your portfolio into stocks, publicly traded stocks. And that may be in the form of individual stocks or mutual funds or ETFs, but whatever it may be publicly traded stocks. The 40%, the other 40% you're putting into bonds or fixed income. Again, that could be individual bonds, that could be municipal bonds, that could be lots of different things.
SPEAKER_01And once again, at a fundamental level, a bond is simply a loan. Right. It's a you're you're lending money to a government, to a company, you're getting paid a flat interest rate. Uh, a bond is a promise to pay. In most cases, it's not backed by anything except for the company's promise to pay in situations.
SPEAKER_02That's right. And the concept there is you've got 60% in stocks, which tend to have higher growth and at the same time tend to be more volatile. You combine that with the 40% in bonds, which has lower growth but has kind of consistent income and is going to be more stable. And so you over time that provides a more diversified, stable result, which has historically been provided us pretty good returns.
SPEAKER_01If you really think about it, putting kind of our financial advisor hats on for a moment, the reason why um that's been popular is because you with the stock piece, you get the growth. So you can have growth that's higher than inflation, because that's at the end of the day, that's what it's what's important. What is your real return net of inflation? And so um stocks tend to have outsized returns during good years, and so you get that growth and you can actually see that lift the portfolio over a longer period of time. The downside of that is what though? You have a market correction, a recession. The market's down 40, or in the case of 08 or even the dot-com market.
SPEAKER_02We all remember the great financial crisis.
SPEAKER_01That's right. So suddenly the 60% is now 30, it's it's half of what it was, or it's 40% of what it was. And so that's where the bond piece comes in. When you have the bond piece, one, it produces a decent amount of stable income. If you are in the accumulation phase and you are just trying to grow your portfolio, that money just gets reinvested. And so that's you know, some nice additional savings that goes in and buys more shares of both stocks and bonds. Um, if you're in retirement, that can help to fund a part of the income that you're ultimately generating. But the other really important thing is historically at least, bonds have tended to hold up well, even in some cases being positive in the midst of a recession or a bear market or the stocks drop. And so that's where people would pull money from when the market is down. Because you don't want to take money out of the stocks when they're down 40 or 50%, it compounds the loss. Right. And so when you take that money out of the bond market, it allows you to hold on to the stocks, not be forced to sell. And so that's why the blend has worked so well.
SPEAKER_02Right. You look back to like a 2008 type of scenario, the stock portion was down 40, 50 percent. Bonds in many cases, depending on what you owned, were actually up that year. Yep. And so if you're needing to take income, take distributions from the portfolio, that gives you that piece that is not impacted by the market correction that we're going through.
SPEAKER_03That's right.
SPEAKER_02So I think it's also important to note one other thing that I think it would be good to define a little bit further that you mentioned earlier, which is a real return. Yes. When we think about a real return, obviously a lot of us, when we look at our investment portfolio, we think, oh, great, we earned six, eight percent, whatever it may be. But that's not the real return. When you think about the real return, we're taking a look at the return that you received, and then you subtract from that inflation because we really want to look at how much greater is our purchasing power today than it was, you know, last year or five years ago, or 10 years ago. And so when we're looking at real return, think about the return that you've received and subtract inflation from that. So the objective would be to at least be keeping up with inflation. In most cases, you want to be seeing a real return that is meaningfully positive. So just a quick example if you've got inflation at 2% or 3% and you've made a return of 6%, you subtract that 2 or 3%, and now you've got a real return of 3 or 4% instead of the actual 6% that you're getting on your portfolio. So just kind of a foundational understanding of a or a definition of uh something that's in that we'll be talking about a bit as we go through the conversation here. So then let's step into kind of the history of what brought the 6040 about. Where did that come from? Um it really was birthed or you know, the concept really came from this idea of something called modern portfolio theory, which was popularized or developed by a guy named Harry Markowitz. So maybe you can talk to us a little bit about that, Josh, and you know, what his philosophy was and thought process.
SPEAKER_01Yeah, so Markowitz's theory essentially was you want to have diversification, which gets pounded into our heads these days. But basically, we want to have these different assets that are not correlated together and we want to pair them together. Because if you can do that, as we described earlier, you can have, you'll have pieces that are growing rapidly, you'll have other pieces that are more tame. But when you combine them together, you reduce the overall risk that you ultimately won't accomplish your objective. So specifically think about that. Like, let's say, as an example, you had 100% in stocks. You hit 2008, let's say you had a million bucks and you were pulling out $40,000 a year. Well, suddenly your million dollars is now worth $500,000. You before, when you were pulling out that $40,000, you were pulling out 4% of your portfolio. Right. Okay. Now, in the midst of the 2008 financial crisis, are you pulling out 4% anymore? No. No, it's eight. You're pulling out eight. We're pulling out double the amount. So now we are compounding the loss. Right. And so what Mark Witz's theory was, I we can reduce the risk by investing in assets that are less risky, that have a higher probability of success, because that's the unique thing about bonds. Bonds or other investments that are safer like that tend to have lower risk characteristics. In the case of bonds, it's because there's only one thing that needs to happen with a loan for you to make your return, which is you hold it for the full period of time and you get paid back. Right. That's it. Unlike a stock where the CEO can be involved in a scandal or your growth rate can slow, or any one of a hundred
The 40-Year Miracle
SPEAKER_01factors could cause stocks to move in a crazy way. Bonds, um, at least in theory, only have to see repayment.
SPEAKER_02You might have volatility in between there, right? But the key is we need to get paid back.
SPEAKER_01That's right.
SPEAKER_02And if you loan $100,000 and you get $100,000 back plus the interest, that's success. You're in great shape.
SPEAKER_01Bingo. And so this idea was if we can diversify and have these lower risk assets combined with these higher risk assets, we can have a more stable ride along the way and we can still achieve a meaningful return. And so that broader concept was the baseline from which the 60-40 portfolio came to be.
SPEAKER_02Now, what was interesting was Harry actually ended up winning a Nobel Prize for his development of the modern portfolio theory. Now, what's also interesting is he did not dictate the 6040 concept, right? He uh talked about the value of diversification and all of that, and somehow along the way, that became synonymous with this concept of 6040.
SPEAKER_01Well, and part of the reason it did is we we and we talk about this. There's this idea of the 40-year miracle.
SPEAKER_03Yeah.
SPEAKER_01From 1980 to 2020, the 6040 portfolio had an amazing return of 10.2% per year. It's amazing. So we had 60%
The History That Changed Everything
SPEAKER_01stocks, 40% bonds, and we still averaged just over 10% per year.
SPEAKER_02Yeah, it became popular because it worked.
SPEAKER_01It worked. It was effective.
SPEAKER_02It was during that 40-year period.
SPEAKER_01Exactly.
SPEAKER_02Yeah, so I I think the the next place for us to go here is why was it so effective during that 40-year period? We describe it as the 40-year miracle. I think it'd be good for us in this episode to really just focus in on that 40% of the uh 60-40 portfolio. We'll talk about stocks in a later component, but let's talk about why bonds were so effective during that 40-year period. And I think it really begins with the fact that inflation from kind of when Harry Markowitz developed this concept until the early 80s, and more specifically in the 60s and 70s, we saw a rapid increase in inflation. That kind of set the stage for this 60 or for the 60, 40, 40-year miracle was this increase in inflation. What ultimately caused that and and led to that uh rapid increase in inflation?
SPEAKER_01Yeah, so if we start back, let's go back to like 1953. Okay. Okay, so a couple of uh players that we're gonna look at here. They're not really people, but just things that we're gonna be talking about a lot. The first is the 10-year bond. What is the 10-year bond? The 10-year government bond is the whenever the government makes takes out a loan for 10 years. They they pay a certain interest rate. We're gonna be coming back to the government 10-year bond a lot. And so I want us to start though in like 1953. In 1953, we see the government tenure bond at like two and a half, three percent. Yeah, very low rate by historical standards. This was a period of time where um the central bank had lowered interest rates. There was this idea that if we can have you know a little higher inflation, we can actually have full employment. So they were playing around in 2020. It's gonna be okay.
SPEAKER_02It's kind of like playing with fire. It really is.
SPEAKER_01It's like, look, if we can burn, if we can set fire here, everything's gonna be okay, but we can keep it under control. Don't worry, it won't, it won't get bad. So you have the easy monetary policy where interest rates are kept artificially low. You then have a couple of major events that occur in the 60s, 70s, and 80s that really start to cause inflation to begin to slowly build to traction and then become a roaring flame. So a couple first one, 1971, we go off the gold standard. So Richard Nixon says, Hey, having gold backed currency uh is really getting my way. And so I actually have to be fiscally responsible. So I don't like that. So we're gonna go off the gold standard. Um, and so we did. At that point, the US dollar um before for every dollar there was actual gold that backed it. And at that point, that stopped.
SPEAKER_02It's what's called fiat currency.
SPEAKER_01That's right. Now we're basically saying it's our financial strength that makes this valuable, right? So long as we're financially strong, it's gonna be worth something. And if it's not, too bad. Yeah. So, and at that point, that's when the government actually came to the ability to actually print money without anything backing it. Right.
SPEAKER_02Physically have to have enough gold to back up the new dollars. That's right.
SPEAKER_01So that was the first major shift, uh, a major cornerstone event. The second was a couple of smaller pieces, still very significant, but also key players in the story, which is one, uh, we had very powerful unions during the time. Yeah. And in many cases, they had contracts that index their wages directly to inflation. So imagine you have a year where inflation is 4%. Well, guess what happens? The cost of wages next year goes up 4%. Well, guess what? When you increase the cost of wages by 4%, what happens? Inflation goes up again. Inflation goes up again. So it becomes this hamster wheel that is really difficult to get off of. On top of that, the U.S. at this point in time is not um is not energy dependent. Why don't you talk about that a little bit?
SPEAKER_02Not energy independent. Yeah, we're not energy independent. Yeah, we're dependent on uh other countries to import oil.
SPEAKER_03That's right.
SPEAKER_02Right, yeah. So we had two real important historical events occur at that time. One, we had the OPEC oil embargo, where you know that obviously
When Inflation Took Over
SPEAKER_02increased prices for oil as they ended up um limiting how much they would allow out and impacting prices in a very positive way for them, negative way for us as importers of that oil.
SPEAKER_01And our generation doesn't even remember this, but it's like you had legitimate shortages where you had lines, gas lines in order to actually even get the supply itself. Right. It's not that it was just expensive, it was literally, am I gonna get this? Right.
SPEAKER_02It wasn't it wasn't there.
SPEAKER_01Yeah.
SPEAKER_02And then the second thing, which also contributed to that, was the Iranian revolution. And when when the uh Islam, is Islamic um leaders there took over the free Iran at that point, it really hampered the flow of oil to the rest of the world. Is Iran was a very big player in that component. So you ended up seeing oil prices increase astronomically. And again, like you said, it wasn't just oil prices going up, it was the limits um that we were seeing there. So what that led to was call it the 50s and 60s, early 60s, we were seeing one or two percent inflation per year. No big deal. That little bit of inflation that they're talking about, no problem. You get into the 70s and the 80s, and we're seeing inflation pick up significantly. That's right. So much so that it peaks out at one point at 15%.
SPEAKER_01And really that the Iranian revolution is the spark. Yeah. It's the spark that sets everything on fire. And I think kind of an analogy that's helpful here is inflation is a lot like a drought. When the more inflation that you have, the drier the grass is, the less rain things the rain has been there. And all it takes is a small, a small spark in order for inflation to start to get out of control. If you're in a period where it's lower inflation, it's like having some green grass. Right. Okay, yes, if you dump a bunch of gas on it and you put a match, yeah, you're gonna eventually get a flame, but you have to do a lot more things wrong in order for the fire to really get out of control.
SPEAKER_02Yeah, we're in a very dry area at that point.
SPEAKER_01Yes.
SPEAKER_02And just a little spark can can really kick that off. That's right. So here we go, into the late 70s, early 80s, and inflation is out of control. I remember hearing my parents and grandparents talk about the fact that they would buy things at the beginning of the day because it was gonna be cheaper than it was gonna be at the end of the day, which is just really hard to for us to imagine in in today's world. But that that is the stage that is being set as we go into uh the beginning of the 80s. And what ultimately led to that trend or that uh scenario being unwound or broken was Paul Volcker being appointed as the chair of the Federal Reserve. And he came in and did something that was really counter-extreme. Yeah, very extreme to what everybody was thinking there. He increased interest rates significantly.
SPEAKER_01Massively.
SPEAKER_02And when I say significantly, he took the federal funds rate to 20%. This is just unheard of up to that point. And what it ultimately did, and he had some periods where he raised rates, lowered rates, but in the end, he ultimately raised it enough that it broke the back of the economy to begin with and drove us into a couple of severe recessions there in the 80s. But that ultimately killed inflation.
SPEAKER_01And it's important just to kind of step back. When you have inflation get out of control like that, there is, in fact, there's never in history been a period of time where inflation has gotten above 5%. Right. Where we didn't ultimately have to see have a recession occur in order to see inflation come back to below 2% on a more permanent basis.
SPEAKER_02Right.
SPEAKER_01Now, we're living in a period right now where we're still hovering at like three to four. Um, and you know, so who knows? Maybe this is the exception to the rule. We've this time it's different. Maybe this time it's different. That's a dangerous set of words to say in economics. But um, and that was proven out to be true at that point in time. Another way to think about it is this way: when the Federal Reserve raises
The Bond Bull Market Explained
SPEAKER_01interest rates, it's like take determining the amount of oxygen that comes into a room.
SPEAKER_00Yeah.
SPEAKER_01Okay. So the lower interest rates are, the easier it is to borrow money, the faster the economy can grow. The higher interest rates are, the only reason people are gonna borrow at that kind of rate is if they have a return that they can make or a need that is so great that would induce them to pay that high of an interest rate. And so the higher that interest rate goes, it's the equivalent of taking let more and more oxygen out of the room. And so effectively it's like eventually the economy just keeled over and fainted because there no one was gonna borrow money except for the money.
SPEAKER_02Nobody was spending money to, you know, to do business.
SPEAKER_01Yes.
SPEAKER_02Yeah.
SPEAKER_01Massive slowdown.
SPEAKER_02Yeah. So that led to a bunch of recessions. But here, here's the key thing. You saw the 10-year treasury, right, which we talked about earlier, which is the the interest rate that we as investors would loan money to the federal government for 10 years. That interest rate, like you said, was about 2.5% back in the 50s, got all the way up to almost 16% in the early 80s, which is crazy.
SPEAKER_01I bet a lot of our investors would be really happy to park money in a bond and make 16% per year.
SPEAKER_02Now, the one caveat there is you got to be willing to accept inflation of 15% per year.
SPEAKER_00Yeah, that maybe not so interesting anymore.
SPEAKER_02A little bit a little bit difficult at that time. But here we are with the stage set for this 40-year miracle. And that leads now to the period from the 80s, early 80s to 2020, where we see, for all intents and purposes, effectively a straight line down and to the right of interest rates.
SPEAKER_01Yeah, there's some roller coasters along the way, but the general trend is it's an always moving down number. And so you're right, this is the turning point in the story. This is the point where inflation has peaked, interest rates peak, and from this point forward, you see inflation get under control once again, because the recession kills inflation. And so starting in like 1981, we actually start to see bonds actually make a real return. Because before that, they hadn't. Before that, interest rates, at least for a period of time, um, had been lower than what that inflation rate was.
Why Bonds Lose Value
SPEAKER_01That's right. And so you had a real, a negative real return. Right. And so finally, once the back of inflation gets broken, you see inflation begin to fall, the interest rates are still here, but the inflation is now down here. Right. And so that is the this is the sets the stage for the 40-year miracle and the 10.2% per year return that we see from 1980 to 2020.
SPEAKER_02I think it's important for our listeners to understand that when we talk about returns for bonds, there is an important relationship there that we have to recognize. And that is bonds performance is directly tied to interest rate movements. So when interest rates go up, bond prices go down. And when interest rates come down, bond prices go up. Very easy analogy to or example to show why that works is let's say that we have a bond. We we we buy a bond or we're gonna do it. Let's make it simple.
SPEAKER_01Let's you and me lend money to each other.
SPEAKER_02Okay, I lend money to you, Josh. Uh let's say I lend you $100 and uh you're gonna pay me 3%. Okay. Okay. So three bucks. Three bucks a year. It's gonna be a great deal. Interest rates change now, and I look to loan money to you again, but it's gonna be four.
SPEAKER_01Let's say inflation has gone up to 10%. Yeah. And so now um, you know, interest rates are now 12%.
SPEAKER_02Right. Right. So now it's meaningfully higher, right? Than the three percent. So how does my three percent bond look to other investors? Highly unattractive. Very unattractive.
SPEAKER_01So in order for it to be attractive again, and think about why it is unattractive. It's unattractive because if inflation is at 10 and I'm paying you three, you are losing seven percent per year in real purchasing.
SPEAKER_02Well, and at the same time, I could lend to somebody else and get paid 12. Exactly. Right? Bingo. So it's both those those factors coming into play there. But in order for my bond now to be attractive, I've got to lower the price significantly to make it equivalent to somebody earning a 12% rate of return.
SPEAKER_01Exactly.
SPEAKER_02And that 12% that you're earning, let's say it's a 30 year bond, is now I could be earning 12% for 30 years versus earning 3% for 30 years. Sure. That has a significant impact on things. So the the baseline truism that we need to recognize here or fact is that when interest rates go up, bond prices go down. And when interest rates go down, bond prices go up.
SPEAKER_01And so using that same analogy on the flip side, let's say that instead I'd lent money to you at 12%, inflation goes from 10% down to say that, you know, 3% level, and now people are lending it out at 3%. My 10% loan to you is now worth a lot more. Right. Because it's really attractive. It's really attractive. Because everybody else, new money going out to loan at existing rates is three versus 10. I people are going to be willing to pay me a lot more. So my bond value is also going to go up a lot along the way. The other concept that this does introduce, which is important, is within investing in bonds, there's this concept called duration. And to put it very simply, duration measures how sensitive the price of a bond is to an interest rate move.
SPEAKER_00Right.
SPEAKER_01And really to break through a lot of complexity, the longer term a bond is, the higher duration it's going to have, because that interest payment is locked in for a longer period of time. If it's a shorter term bond, say a one-year bond, it doesn't matter as much because you're going to get paid back in one year and you get to reinvest at whatever the new interest rate is. So you're not going to be nearly as interest rate sensitive. But if you have a 30-year bond where you're going to have a much higher duration because it's going to be more closely tied to what your set interest rate is at that particular point in time.
SPEAKER_02It takes two seconds, it is completely free, and helps us continue to bring you high quality content. So that sets the stage now as we go into this 40-year period. We've got interest rates for the 10-year treasury at 16%, inflation
The Greatest Tailwind in Investing
SPEAKER_02coming down, and we're going to start to see interest rates drop over the next 40 years. So why don't you talk to us a little bit, Josh, about that factor? But then there are a couple of other factors, I think, that led to bonds being so effective at uh during that 40-year period.
SPEAKER_01So a couple of things. Let's let's talk a little bit about the history first, and then we'll hit some of those factors. So the first thing on the history side, one, what also happens in the 80s? We get a we get Ronald Reagan, yep, where we see um individual tax rates drop a lot. So this is one thing a lot of people don't realize. Today, tax rates in the US are the lowest they have been historically for like a hundred years. Yeah. So the highest tax break bracket for a high income earner above seven or eight hundred thousand bucks is 37% at the federal level. Back then, I think we're talking like 50%, maybe even 60 in some cases. So they cut that.
SPEAKER_02And if you look at including state taxes, sometimes it was pushing 90%.
SPEAKER_01I mean, yeah, during during other periods, especially during World War II, it got as high as like a 90% federal rate. But at that point in time, probably looking at like a 50 to 60% rate. So one, tax rates go down. So that generally that helps the economy to start growing a lot more at that time. Um, two, we're at a stage in our country's life where economic growth is a lot higher, yeah, which also helps with things. Along the way, the power of unions got reduced pretty heavily during that period of time. There were a lot of states that saw the impact of what happened in the 80s, and so a lot of the union um strength was decreased. There was a lot of states that basically didn't would make it either illegal for the unions to exist or made it much harder for them to try to compel other workers to be part of it. So that was another contributing thing.
SPEAKER_02Ronald Reagan contributed to some of that too.
SPEAKER_01Yep, so he contributed to that. The other thing is we also see this massive boom in efficiency. So between the personal computer, eventually the internet, the mobile device, cloud, all these things happen which make us a lot more efficient, which causes, which is a disinflationary force. Disinflation meaning we're not seeing inflation grow as at as rapid of a pace. Right. Um, even deflation with certain product categories. Right. And so all those things are great when it comes to for bonds. And so um, as you mentioned earlier, back to the kind of basic principles. Once again, if interest rates go up, we see bond prices go down. But when we see interest rates go down, bond prices go up. So let's just think about this in real practical terms. So that 40% of the 60-40 that's bonds. If you are in 1981 and you're at the peak interest rate of 16%, one, if let's say inflation is 10%, just to make my math easy, that means my real return on the bond is six. That's right. Six percent. But it's not six percent because interest rates start to come down. Right. And now my bond is worth more. So maybe I add an extra two, three, four, five percent to the returns.
SPEAKER_02In appreciation of it.
SPEAKER_01In appreciation of just the interest. It's not just the income, that's right, it's the actual growth in the bond. So not only am I making a real return on the income, but I'm also making additional return as the bond price goes up. And
The Best-Case Scenario
SPEAKER_01that can be very meaningful, especially on longer-term bonds along the way. So the point is this we have this incredibly unnatural period. The fact that, once again, we've never seen a period like this in US history where interest rates have spiked to 20% at the Fed funds rate. And it creates this artificially high interest rate period where we start to march back down towards a more normal level. It's much a more average kind of you know, 10-year treasury interest rate is probably in the high fours to mid to high sixes. Right. That's probably a historical average. So we begin that march from 16% back down towards that normal historical level at that point, which could once again means we get to clip the nice higher than normal income rate because we're coming off of that high period, but we're also getting to clip another two, three, four, five percent of appreciation on average each year from the value of the bonds going up.
SPEAKER_02You're getting some tailwinds from that, from that respect. And that ultimately culminates in something that turned a good period into an exceptionally good period, which was 2008. Bingo. Right? In 2008, we had the great financial crisis, which was a very difficult, obviously economic time, deep recession for our country. But what did that lead to? That led to the Federal Reserve cutting interest rates. Yeah. And they cut interest rates down to zero. And we were in this period that's called ZERP, zero interest rate policy, for many years. And we actually saw in 2020, when that kind of ultimately got the, you know, kind of the lowest point that we saw the 10-year treasury drop, it got to almost half a percent. Half a percent. So we go from 16% in the 80s to half a percent in 2010.
SPEAKER_01So just think about it. We went we had a decline of 15 and a half percent from the high point on the 10-year treasury.
SPEAKER_02Right. And it was just basically a steady decline over that 40-year period, which, as we talked about, is one of the key primary tailwinds that we have for bonds.
SPEAKER_01And if you really think about it, literally, we got to the almost the absolute best case possible scenario that a bond could ever have, because interest rates really can't go lower than zero. Right. Right. So literally, we got to the absolute, like if you're if you're thinking about the probabilities of this happening, this, you know, if you're thinking about if you're if you're born in 1981 and you were to said to predict what interest rates would be in 2020,
Why Past Performance May Mislead Investors
SPEAKER_01right? Out of a 10,000 people, I don't think anybody nobody's saying half a percent. It's a half a percent. That that thought doesn't even cross people's minds at this point.
SPEAKER_02Yeah. We basically go from the highest they've ever been.
SPEAKER_01To the lowest to the lowest they've ever been.
SPEAKER_02Exactly. I mean, it's it's it's a perfect 40-year miracle. It is for bonds. And that's the environment that the 6040 was birthed in, basically.
SPEAKER_01And the hard part is is once again, for for nerds like us that study this, it's a fascinating thing to think about, but the average person has no idea.
SPEAKER_00Right.
SPEAKER_01They do not understand one, the um the crazy set of circumstances that result in the peak of the 80s, nor the massive turn of events that we saw in 2008, which resulted in us being willing to go from that normal high fours to high six percent rate to allowing it to go down all the way to a half a percent. Just a an incredible set of circumstances that I really doubt we will see again in our lifetime.
SPEAKER_02Right. I thought I think you're right. And and the reality is most of the investing public today doesn't have any experience with anything other than that massive tailwind for bonds. Right. So when you invest in bonds, what do you think? That's what they're supposed to do. It is. Right?
SPEAKER_01You get we look at history. Ever, it's like, you know, it's in in our industry, there's a notorious phrase which is past performance does not indicate future results. And a lot of people are like, blah, blah, blah. Yeah, sure, sure.
SPEAKER_02But what did it do in the past?
SPEAKER_01But it but in that but in this case, it actually is true. Right. Because it really comes back down to more fundamental things, which is what actually drives the return for bonds. And it really comes down to really three
Closing Thoughts
SPEAKER_01things. Obviously, if someone defaults and goes bankrupt, yeah, you're gonna lose some money. But outside of that, it comes back to two things, which is the interest rate I get paid and what happened to the interest rate during the period that I owned it. Did it go down? If it did, I made additional money, and if it went up, I lost money. And and how much did it go up and did it offset the income I was making in that process?
SPEAKER_02Right. And that is the setup, really, for why we believe one of the reasons, I guess I should say, of why we believe the 6040 is dead. And we'll get into details about you know how the environments change today in future episodes, but this is why people today have such belief in the 6040, is at least on the bond side, this 40-year miracle that we've seen from the 80s uh to the 2020s.
SPEAKER_01Agreed. Absolutely.
SPEAKER_02I'm looking forward to the next episode. It's gonna be a lot of fun.
SPEAKER_01For sure.
SPEAKER_02The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Investing includes risks, including fluctuating prices and loss of principle. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA, and SIPC, the Fox Alliance Wealth Advisors is a separate entity from LPL Financial.