How are bond investors doing vs. inflation?

Our government has provided us with a fresh fictitious inflation report today (the fiction is that a person can rent the same single-family home in the U.S. for 20 years and do so at a cost lower than mortgage, property tax, maintenance, insurance, etc.; “owners’ equivalent rent”).

Conventional advice for retirement saving is to buy at least some bonds rather than hold an all-stock portfolio. How can that work given the miserably low yields on inflation-protected bonds (TIPS) and the payments in nominal dollars that get ravaged by inflation any time our wise politicians feel the need to print money?

“A Yale Professor’s Investment Formula Says You Need More Stocks. See How It Works.” (Wall Street Journal, February 2026):

The formula’s central insight is that the future paychecks and retirement benefits that someone has yet to receive in their life are, when taken as a whole, like a bond because fluctuations in earnings aren’t strongly correlated with stock-market returns. For this 25-year-old, that big, bondlike chunk of future money means they could more easily weather a steep drop in stocks.

As another example, the way it treats a hypothetical middle-aged couple differs based on the amount they have saved up.

In both scenarios, the formula steers the couple toward a lower equity allocation than it did the 25-year-old, because a smaller share of their lifetime income is still to come.

But it recommends a much lower allocation, 53%, when the couple has twice as much money to invest, because in that scenario upping the equity allocation would alter the risk profile of a larger proportion of their projected lifetime resources.

“It’s more conservative when you have more money saved up,” Choi said.

For a middle-aged couple with what someone in Miami would call “no money” (either $400,000 or $800,000 saved, neither of which will pay for a kitchen renovation), the Yale genius says that two men (it’s the WSJ so both participants in the “couple” must be guys in order that they can eventually form an all-male throuple) should have as much as half their portfolio in bonds (the non-academic non-geniuses at Vanguard give these two guys only 24% bonds):

What drops out of this thinking, for people aged 70, is that they should have somewhere between 35 and 70 percent of their investments in bonds:

After living just recently through Bidenflation and having a personal memory of the Jimmy Carter-era inflation (maybe not too different, actually, if CPI were calculated in the same way), this seems intuitively wrong. The 70-year-olds could live to be 100 via GLP-1 and whatever medical miracles LLMs can come up with. The 70-year-olds might care about leaving some money for their children and grandchildren, now forced to compete with 70+ million immigrants with whom the Boomers didn’t have to.

Maybe we can simply look back. The “keep adding bonds with age” strategy is embodied in the Vanguard funds. The Vanguard 2030 fund was created almost exactly 30 years ago. It has returned about 7% per year:

2006 wasn’t a great time to buy an all-stock portfolio, since you had to make it through the Collapse of 2008. Nonetheless, ChatGPT says that SPY has enjoyed a total return (dividends reinvested) of over 11% annually since then. The difference of 4% doesn’t sound huge, but that’s 100 percent of the standard formula of how much a person can spend in retirement from his/her/zir/their assets and not go broke for 30 years. For someone who started with $100,000, the S&P 500 investment would have grown to over $830,000. The same investor in the Vanguard part-bond fund would have only $430,000. That’s the difference between a totally-pimped house in The Villages (the fun center of Elder Florida) and a used/basic house in The Villages.

Note that the above calculations don’t include federal, state, and/or local income taxes that the investor would have had to pay on the dividends received into any non-retirement account. Taxes are worse for the part-bond investor because the yield is taxed as ordinary income and not subject to the qualified dividend discount. Also, stocks deliver much of their return via appreciation rather than by paying dividends. So the corporation may pay income tax, but the investor need not. ChatGPT says the $830,000 stock portfolio would be more like $625,000.

How about all bonds for 20 years? ChatGPT says the return would have been only 3.1% year. The $100,000 would have become $184,000, a laughable $12,000 in appreciation after adjusting for official CPI (i.e., it would have shrunk in terms of the ability to buy and maintain a single-family home). This turns into a real-dollar loss if held in a taxable account, having appreciated to only $144,000 in nominal dollars. The $100,000 became $87,600 in 2006 purchasing power (official CPI).

I’ve always struggled to comprehend why investors are willing to buy bonds priced in nominal dollars, which nearly all bonds are. Someone took the other side of our absurd mortgage, issued at 3.125% just as Bidenflation was gathering a major head of steam in February 2022. I would love to meet that person and ask “What did you think was going to happen?”

Readers: Can someone please sell me on why a typical investor would have even 1% bonds in his/her/zir/their portfolio? Let’s assume we’re talking about a 65-year-old. Because this person has money, it is likely that he/she/ze/they has children (fertility vs. income shows it is Americans with zero income and those with high incomes who have kids; the working class are being bred out of existence). Our hypothetical saver wants to not run out of money even if death comes at 111, which was the age of the oldest person receiving General Motors pension and health care benefits before the company went bankrupt/got bailed out by us in 2009 because they couldn’t pay their union retirees all of the promised pension and health care benefits. Our hypothetical saver would rather leave more than less to his/her/zir/their children and grandchildren. We’ll assume that 30 percent of the saver’s portfolio is in a tax-exempt retirement account. Could the answer be “It makes sense to buy bonds when the S&P 500’s average P/E ratio exceeds a threshold and trade them for stocks when the S&P dips”?