If you aggregate the bond returns all of countries and 'invest' in that return series, almost certaintly your backtest will stop at some point because you will lose 100%. Even if somehow you don't, you will be hit with several 90-99% real return drawdowns (with no offsetting big gains like usually happens in stocks), which calls into question in how one should invest in that asset class in the first place. It's very difficult to produce a positive return after losing such huge amounts. There is just so many countries that wiped out bond investors (either through inflation, outright default or something else), the more data I get the more I think that fixed income is like a big illusion. Check out Reinhart and Rogoffs book, even countries like the US have had 200% inflation in one year. US investors like it because they are looking from the perspective of suvivorship bias. They did great (like top 5 in the planet over the last 100 years great) but that doesn't tell you the average or median global experience nor it tells what's going to happen in the next 100 years. Also, people from around the world read finance books written by US authors (who have that suvivorship bias perspective) and they draw conclusions that they should not about their own country fixed income markets. These folks are then driven to the slaughter house Only way I can see fixed income making any sense (in the long-run), is to have some kind of stop loss/exit strategy or to invest in a global fixed income portfolio with many countries in it. Otherwise, the clock is ticking and at some point you will lose it all or close to it. If you are fortunate enough to have choosen the 'right' country, you might avoid that your whole life, but that doesn't mean that you didn't play financial russian roulette...
So...in theory, a diversified global SHORT bond portfolio would be an interesting play, especially right now...considering interest rate risk (low/negative rates around the world) and government incompetence/default risk (huge deficits)? Is such a SHORT bond strategy realistic? Just brainstorming here, but I like your post...it's thought provoking!
What year was there 200% inflation? I think you've gotta discount what happened over a hundred years ago in a far smaller, more isolated, more agrarian country as not terribly relevant to today's economy, and for that you're looking at 17% in 1918 as the worst inflation year. Think about it this way, you would have been killed if you decided to go short a diverse country bond portfolio back in the 70's when we were all supposedly going to hell in a handbasket with runaway inflation.
Sig...going SHORT a bond portfolio in the 70's would've done well...interest rates up and bond prices down.
No, interest rates were high and did nothing but fall from there. If you'd been short 30 year bonds you would have been killed over the next 30 years. Even if you were in short term bonds and just rolled your shorts every year untill now you would have been killed.
I thought we were talking about the 70's...not the 80's to present. Interest rates skyrocketed through the 70's until early 80's...they started coming down in 1981...still +15% in 1982. Again, a short bond portfolio would have done great in the 70's!
That's the point, once you aggregate all the data, returns are either negative or close to 0%. Its only when you pick and choose specific periods or specific countries that one is able to get comfortable with bonds
Well, yeah, that's kinda my point... You can't arithmetically lose 100%, unless it's a hard default (which isn't very likely with a sovereign). I am just curious why you think that bonds are significantly different in terms of the risk of extreme drawdown to, say, stocks. Based on all the somewhat recent distressed experience that I have looked at, I see no evidence to support such an assertion.