Diminishing returns

  By Guest Blogger Doug Rowat

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A little over 10 years ago, I cautioned clients against loading up on bonds in retirement:

Investors seeking retirement income will need to consider holding more growth assets. A future retirement asset allocation following the traditional 60% fixed income/40% growth model of the past will be ineffective. To fund retirement needs, our clients will need to consider embracing more growth assets in their portfolios. Over the longer term, we believe that the “new retirement” asset allocation is likely to require the reverse: 60% growth/40% fixed income.

Though my message had a pretty dry financial advisor vibe, it proved correct. Since I wrote that in early 2015, the S&P 500 is up more than 13% annually on a total-return basis while the Bloomberg US Aggregate Bond Index, a benchmark for US investment-grade bonds, is up less than 2% annually on the same basis.

But the old retirement wisdom dies hard. Clients who are nearing retirement now still ask the same question: should I have a more conservative portfolio? In other words, should I overweight bonds?

Bonds have an important role: they provide safety, they generate income and they have low-to-negative correlations to a wide variety of other assets. In other words, they brilliantly control portfolio volatility. Further, I suspect that bonds will have better returns over the remainder of this decade than they’ve had thus far. Why? Even though bonds have fluctuating prices, prevailing yields tend to be the best indicator of overall bond returns. This is one reason why bonds returned 12.4% annually in the 1990s when US 10-year Treasury yields averaged 10.6% but only 3.7% annually in the 2010s when Treasury yields only averaged 2.4%. And, naturally, thanks to the 2022 inflation crisis, which forced central banks to aggressively jack up interest rates, bond yields are much higher now than they were four or five years ago. This bodes well for bond returns for the remainder of the decade.

But all of this being said, the long slog of history tells us that bonds aren’t what they once were.

Demographics are powerful and have unavoidable market influence. The developed world is getting older—and rapidly so—and this will forever reshape long-term investment strategies.

Many factors determine long-term bond yields, but an aging investor is one of the more influential. Older investors continuing to tilt towards fixed income, which again, aligns with traditional retirement advice, will likely keep bond yields low making these lower yields insufficient to fund many retirements.

The US 10-year Treasury yield plotted against the median age of US workers shows this relationship. And it’s not a relationship that’s been diverging for four or five years, it’s been diverging for four or five decades:

Median US worker age (white line) vs US 10-year Treasury yield (orange line)

Source: Bloomberg, Turner Investments. The recent rise in bond yields is a result of the 2022 inflation crisis.

And the below chart shows the end result: declining bond returns decade after decade. Too long and consistent a trend to be an anomaly.

The ‘lost decade’ the the 2000s aside, equity returns have held up. Bond returns? Not so much.

Source: Bloomberg, Turner Investments. The 2020s returns are to the end of Q1, 2025.

Make no mistake, you still need bonds. Unless you have a stomach of iron, you need bonds to provide downside protection and to control emotion, which inevitably leads to poor investment decisions. And, as I mentioned, the coming few years will likely offer better returns. But the recent rise in bond yields was the result of a highly specific event—the 2022 inflation crisis.

Longer term, the more meaningful secular trend encompassing the past 50 or so years will inevitably take hold again. In other words, you don’t need bonds as much as you might think, especially in retirement, which as we know typically lasts decades.

Today’s message might be just as dry as my original one 10 years ago, but my recommendation (for most) to underweight bonds in retirement holds.

Ten years from now I bet you’ll still be thanking me.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/04/11/diminishing-returns/