A Real Look at Bonds
"How Inflation Is Undermining the Foundation of Traditional Investing and Why No One Wants to Notice
I am astonished by how persistently traditional investors cling to outdated assumptions. Just last week, an investment firm was asked whether they’d consider expanding their narrowly constructed two-asset-class portfolio to reflect growing client demand. Their response? A predictable “No,” backed by the same flawed arguments I’ve heard countless times. For tactical reasons, I’ll spare you the repetition.
Inflation Matters
Let’s set aside the fact that, since 2022, bond investors have been underwater in nominal terms, too. A deeper, structural issue continues to be overlooked: inflation.
It took me a while to let go of the nominal-return mindset. But once I began factoring inflation into virtually every analysis, either directly or as a backdrop, the investment landscape started to look radically different.
What’s most disturbing is that the corrosive effect of inflation on assets with no inflation protection is nothing new. The past few years may have been extreme in magnitude, but they merely accelerated a decline unfolding for over three decades.
To underscore the point, consider the following chart: it shows the 10-year rolling real return on U.S. Treasury bonds, that is, returns adjusted for inflation.
If This Isn’t a Trend
If you can’t spot the trend in this chart, I’m not sure what will convince you. Since the early 1980s, when Fed Chair Paul Volcker famously hiked rates to 20%, the 10-year real return on bonds has been in structural decline, eventually turning deeply negative.
In a world where asset managers are dismissed after just a couple of years of underperformance, it’s remarkable how few traditional wealth managers have seriously reevaluated their strategic asset allocation. And just to be clear: private equity and private debt are not the answer. They are still equity and debt; many of their perceived benefits rely heavily on opacity and statistical gymnastics.
Sure, you can always argue that nobody knows the future and that bonds might deliver again someday. You can fall back on the old 60/40 playbook. You can point out that other asset classes lack cash flows. Or you can recycle the usual platitudes about volatility, duration, and liquidity.
But the truth is: there’s a massive mismatch between the (lack of) urgency in rethinking portfolios and the scale of the long-term erosion that bonds have delivered.
Whose Interests Are Being Served?
How much purchasing power have investors lost by sticking with a “balanced” portfolio that’s long since outlived its usefulness?
Meanwhile, the financial industry is consumed with ESG narratives and passive vs. active debates. Regulators appear more interested in trading prestigious job titles than in addressing whether the foundation of the average portfolio is still fit for purpose.
Nobody wants to ask the obvious question. And that, frankly, should concern everyone.
Interested in the Blokland Smart Multi-Asset Fund?
Contact me at jeroen@bloklandfund.com or visit the website.
Want to have a call first? Use this link to book a one-on-one conversation and choose a suitable time slot. You can opt for a Zoom meeting or a phone call. Please note that the minimum entry amount is EUR 100k.
Let’s invest together!
Kind regards,
Jeroen
