A little theory ...

valiant24

Thrugelmir said:

That's the danger of reading a book (and is based on data of an era) that was conceived before the impact of QE kicked in. 

Not sure that's true, as he's been on YouTube and Monevator extolling the virtues of a gilts/global tracker mix within the past couple of years at most.

JohnWinder

valiant24 said:

Quite clearly, bonds- or at least gilts - are not beating inflation at present.  It's difficult to see why people, including me, are invested in them other than, in my case, "Because Lars told me to".

There's a good reason. You were invested in them for good reasons when their returns were positive; reflect on those reasons. It wasn't for the returns, as you'd expect better from equities. It was because that much in bonds and that much in equities suited your risk tolerance, based on your personality, life stage, other assets, maybe hair colour.

Has your risk tolerance changed? If not, why should a different set of market conditions change how much risk you're prepared to take? A ?legitimate reason might be that the returns you're now getting are not sufficient for your needs; but doesn't that potentially lead to taking too much risk and getting burnt if you lose courage and feel compelled to sell during a big fall?

valiant24 said:

Conversely, it's difficult to imagine that stocks can continue to rise as they have over the past 18 months, or even 5 years, yet the advice is to stay invested in VWRL and the like.

What does the evidence say about staying invested vs trying to time the market? Relax, or take this opportunity of high stock prices to buy some more negative yielding bonds.

Diplodicus

valiant24 said:

We all know, or think we know, or I think we all think we know that over the long term equities always offer the best asset class returns, and for the past hundred or hundreds of years have - again over the long term - beaten inflation.

Is there any simple guide or explanation as to why equity values and returns consistently outperform inflation please?

It's a really interesting question to consider, especially if you don't share the optimism of the Governor of the Bank Of England, who reckons inflation will peak at 4% and soon turn down. I don't know the answer but I don't really worry about a reversal of direction taking equity prices back to much earlier valuations, I think it unlikely. 

It is not just equity valuations that have accelerated over a lifetime or two. Real estate and the art market, for example, have raced ahead too.

Diplodicus

coastline said:

Bobziz said:

coastline said:

The UK for one is on a forward P/E of 12.

FTSE All share ?

Just to throw in at the bottom here. There was a thread in January 2020 ? from this investor. Well he's at it again with a read or podcast. Take your pick. He likes the UK for value.

Jeremy Grantham’s Bubble Predictions — MoneySavingExpert Forum

Jeremy Grantham, we're in one of the greatest bubbles in financial history | MoneyWeek

"Well he's at it again." Quite.

If you’re always a bear, you’ll be right some of the time

Grantham famously predicted doom for equities in 2010, 2011, 2012, 2013, 2014 and 2015.

And 2019.

..if an investor listened to Grantham and held back for the last 10 years, they would have missed a 265% return on the US market, not even including dividends.

Moe_The_Bartender

JohnWinder said:

A bond is a promise to return the money you lent, and comes with the safety of an obligation to give your money back. You lose the use of your money for that period, and thus expect compensation for any inflation which will reduce its value by the time the money is returned to you. You also expect some compensation for the deferral of the benefits you get from you spending that money. Bond returns, as safe as they are, should have above inflation returns - long term.

Equities are riskier than bonds; there's no promise you'll get your principal back. Investors demand more return when there' more risk. Does that get to your question?

You seem to be suggesting that the obligation to give your money back guarantees that you will get it back. This overlooks the possibility of default by the issuer. The risk is probably greatest as bonds approach maturity as the issuer may not be able to roll over the debt so even if the issuer has paid the coupon promptly, this gives no assurance that you will get paid out.

Give me equities over bonds every day of the week.

JohnWinder

I wasn't trying to suggest that, but it is as you say. Nonetheless, the UK government hasn't defaulted on a bond for a good many decades, and equities as good as they are come with neither guarantee nor obligation to return one's investment. Hence the higher return I suppose.

Thrugelmir

valiant24 said:

Thrugelmir said:

That's the danger of reading a book (and is based on data of an era) that was conceived before the impact of QE kicked in. 

Not sure that's true, as he's been on YouTube and Monevator extolling the virtues of a gilts/global tracker mix within the past couple of years at most.

He never foresaw the events of the past decade though. The original thesis was based on a different era. Which was little different to the often recommended 50/50 portfolio in the US. We can all look clever after the event. He never recommended this approach either when running a hedge fund for his clients. 

Cus

Moe_The_Bartender said:

JohnWinder said:

A bond is a promise to return the money you lent, and comes with the safety of an obligation to give your money back. You lose the use of your money for that period, and thus expect compensation for any inflation which will reduce its value by the time the money is returned to you. You also expect some compensation for the deferral of the benefits you get from you spending that money. Bond returns, as safe as they are, should have above inflation returns - long term.

Equities are riskier than bonds; there's no promise you'll get your principal back. Investors demand more return when there' more risk. Does that get to your question?

You seem to be suggesting that the obligation to give your money back guarantees that you will get it back. This overlooks the possibility of default by the issuer. The risk is probably greatest as bonds approach maturity as the issuer may not be able to roll over the debt so even if the issuer has paid the coupon promptly, this gives no assurance that you will get paid out.

Give me equities over bonds every day of the week.

If the company goes bust and defaults on its bond, at least you have a chance of some money back. Your equity will be worthless.

tebbins

There's no inherent reason for this I've ever seen. For example there have been periods, I think even upto 30 years when the inverse has been true.

Generally most developed stock market indices grow, over the very long term, around the same rate as that country's nominal GDP. You can check this for yourself using the S&P 500, however even over long periods they can diverge materially.

Three main factors cause 
1. Is rerating or change in PE. If the PE goes from 15 to 30 over 30 years, that adds 2.34% a year to the return.
2. Search William Lazonick - until stock buybacks were introduced in the early 80s most economists expected the return on capital to lag GDP growth due to attrition - capital depreciates, becomes redundant, is competed away, companies constantly require more of it. Since then, stock buybacks have at least in the US overtake dividends as the main payout, instead of those earnings being genuinely reinvested. So ontop of the dividend yield, you get another 1-2% return in buybacks.
3. Corporate warnings can shrink or expand relative to GDP. Eg the imperial Russian stock market's earnings collapsed in the Soviet revolution, S&P500 earnings expanded through the deregulation and privatisation of the Reagan era.

Whereas a bond, particular a government bond is a guaranteed payout. It would take something devestating to cause a loss on a developed countryside government bond (although bonds are still volatile and can yield less than inflation, or less than 0%). As such bonds and stocks are relatively valued in such a way as to make stocks, usually, return more.

valiant24

Thrugelmir said:

1. [Kroijer] never foresaw the events of the past decade though. The original thesis was based on a different era. Which was little different to the often recommended 50/50 portfolio in the US.

2. He never recommended this approach either when running a hedge fund for his clients. 

On the first point, his channels etc only started in 2015 and have continued with this consistent message.

On the second, indeed, it's a good point.   His central thesis is that all but a tiny, fractional percentage of investors lacks the "edge" in terms of aptitude, knowledge and research to be able to "beat the market", hence the recommendation.   He is himself one of that tiny percentage of exceptions.