I updated my two favorite graphs this week. The first shows the cumulative real return for stocks and bonds for the last 100 years. Stocks outperformed bonds by a factor of 100. The second shows the results of head-to-head competitions for stocks and bonds for 25-year holding periods. Stocks are risk free because they’ve never lost money; stocks ~always have outperformed bonds.

 

== Fuel for growth ==

 

The point of this graph: jet fuel (stocks) outperformed candlewax (bonds) by a factor of 100.

 

 

Jet fuel: My straight line for stocks indicates they have averaged ~7.1% real return per year; if I drew the line to the exact end point, it would be 7.3% real return per year.

 

Using the Rule of 72, stocks double in real spending power ~every ten years; 100 years is ten doublings; $1 invested in stocks is now +$1,000.

 

Candlewax: Bonds have averaged ~2.3% real return per year; bonds double in real spending power ~30 years; 100 years is three doublings and 1/3 of the way to the next doubling. $1 invested in bonds in January 1926 is now <$10 in the same spending power.

 

I enclose a .pdf of the graph here.

 

== Stocks crush bonds for 25 years ==

 

The point of this graph: younger folks should be invested in STOCKS ONLY for many years. NO BONDS. Younger folks with an employer retirement plan contribute every month and their employer contributes for them. They can’t even touch this money without severe penalty to age 59½. They clearly have 25-year holding periods for those monthly investments.

 

 

Stocks have NO RISK of loss for 25-year holding periods. Their worst return was a 67% gain. Bonds are risky; they lost money in 22% of the sequences averaging 16% loss in those sequences.

 

Stocks are essentially RISK-FREE relative to bonds: stocks win the competition in 1552 of 1560 25-year sequences since 1871. (And they are on track to win the upcoming 300 next complete sequences). The last time bonds beat stocks was an investment in March 1984.

 

My graphs for shorter holding periods (not shown) aren’t quite as dramatic, but it’s still obvious that those in the save and invest phase of life must invest ONLY IN STOCKS for many years before they hit retirement age.

 

I enclose a .pdf of the graph here.

 

 

Conclusion: I updated my two favorite graphs. One shows the long, long-term trend for stocks is ~7.1% real return per year. Stocks double in real spending power ~every ten years. The trend line for bonds is ~2.3% real return per year; bonds double in real spending power ~every 30 years. Over the last 100 years, stocks have outperformed bond by a factor of 100.

 

The second graph plots the multiple of real return from an investment in stocks and bonds for 25-year holding periods. That’s 1,560 complete 25-year periods since January 1871. Stocks are risk-free because they’ve never returned less than 0%; bonds are not risk-free because they’ve lost money 22% of the time. Stocks are essentially risk-free relative to bonds because they have outperformed bonds in 99.5% of the sequences of return since January 1871.

 

Invest in STOCKS ONLY if you are in the Save and Invest phase of life.

Fidelity issued my 2025 tax reporting statement, and I used TurboTax to file our taxes yesterday. I came close to the 1 hour 32 minute time estimate that TurboTax estimated for our Federal return.

 

I previously issued a line-by-line display of your 1040 to use as a check with TurboTax. The calculation of the “Enhanced (Standard) Deduction for Seniors” was a bit different than I assumed. The bonus deduction is a bit more; the amount of taxes you owe will be a bit less. This is the revised spreadsheet for single filer over age 65, and this is the revised spreadsheet for married, joint filers (both over age 65).

 

This post compares the performance of IUSB (iShares Core Universal USD Bond ETF) to similar Intermediate Core Plus bond funds. In general, nine funds displayed have outperformed IUSB.

 

Everything we own in our portfolio other than stocks is to protect us when stocks decline. We ideally sell something that grows over time and goes in the opposite direction of stocks when they crater. We sell this “insurance” to give stocks time to recover. With one major exception in 2022, bonds have gone in the opposite direction or declined MUCH LESS than stocks when they’ve cratered in the last 100 years.

 

I bought IUSB in 2014 as our “insurance” when Patti and I started our Spend and Invest phase of life. It was the only Intermediate Core-Plus Bond index fund at the time. I thought this was more representative of the total US bond market.

 

== Core Plus Bond Fund ==

 

A Core Plus bond fund holds bonds other than investment-grade. IUSB holds about 7% of its portfolio in bonds below investment grade. This sheet shows the performance of IUSB compared to the Bloomberg index it tries to match.

 

IUSB returns about 0.3 to 0.5 percentage points more per year than an index fund of only investment-grade bonds.

 

== Other Core Plus Funds ==

 

This recent Morningstar article lists seven top-performing actively managed “Intermediate Core-Plus Bond” funds. I show the performance of these seven and two more: one from Fidelity and one from Vanguard. (PDF here) All have outperformed IUSB.

 

 

I highlight DODIX, which looks most attractive to me: high return and lowest decline in 2022; it has less below-investment grade bonds (Grade BB and lower = 4.4%) than the index (7%) or all others on this list; CINCX holds 23% bonds below investment-grade, for example. (Our money is at Fidelity and DODIX is not one of their No Transaction Fee mutual funds; I will not pay a commission to buy DODIX.)

 

 

Conclusion: We retirees need to hold bonds. We want to solely or disproportionately sell bonds when stocks crater. With one major exception in 2022, bonds have gone in the opposite direction or declined MUCH LESS than stocks when they’ve cratered.

 

Patti and I have held IUSB since we started our retirement plan in 2014. It’s categorized as a Core Plus bond fund; 7% is higher risk, not investment-grade, bonds. It’s more representative of the total bond market. IUSB has returned more than the index for investment-grade bond funds. This post shows nine actively managed Core Plus bond funds that have higher expense ratio but have returned more than IUSB.

Years ago I contributed to a CMU (Carnegie Mellon University) fund to honor John R. Thorne. I received a short report on the performance of that fund this week. I quickly calculated 10% return the last year. That led me to the annual report on CMU’s total endowment fund. It’s similar to most university endowments: they have the goal to beat the heck out of public stocks and bonds. They invest in things that we individuals can’t invest in. Publicly traded stocks and bonds are only about 35% of the total. Private equity is 45%. Hedge funds are another 12%.

 

Are they killing it? NO. Lil old me with four index funds has done better. You’ve done better if you follow the recommendations in Nest Egg Care. We’re not missing out on far better investment opportunities only available to the big guys.

 

Details:

 

Here’s the endowment’s investment mix: that looks COMPLICATED!

 

 

Here’s the performance comparison: I win for all periods displayed.

 

 

The endowment’s mix is 85% equity and 15% fixed income; I used 80% and 20% in my calculation. Had I used 85%-15% (my current mix), my returns would be about ½ percentage point better per year.

 

====

 

I scan this report that reports on the performance of more  than 650 university endowments for the fiscal year ending June 30, 2024. I think the CMU endowment performs better than average. Private equity and hedge funds do not look like paths to riches.

 

CMU’s Chief Investment Officer is the second highest paid employee the University: $1.5 million in 2024!

 

 

Conclusion. We individual investors can’t invest like the big boys can. We can’t invest in private equity or hedge funds to get superior returns. A class of big boys, university endowments invest far more in private equity + hedge funds than publicly traded securities in their effort to dramatically outperform. I show in this post that at least one does not outperform us little guys who hold just a few broad-based stock and bond index funds.

I had a very good picture of our 2025 tax return by January 10 this year. I think you can get a very good picture of your return in about an hour. I’m actually looking forward to completing our return this year!!!

 

1) I made a simpler, clearer template of the 1040 for 2025 as compared to one I provided before. I show lines of the return as they appear on the 1040. Here it is for married, joint filers and for single filer. (I think I’m accurate on the calculations, but no guarantees!)

 

2) I made a list of where I get all the input for all the lines. I can get most that we need for an early look from our 12-31-25 brokerage statement. Our final tax reporting document (due tomorrow) is going to agree with it, but it will have some added detail. One detail is Section 194 dividends that determines the QBI deduction for line 13a of our 1040.  

 

I think you can complete your spreadsheet in less than an hour if you are familiar with your brokerage statements. My task may be easier that yours: we don’t itemize deductions (Schedule A). I really don’t need to track those expenses for our tax return. I do track them out of habit, however.

 

My estimate says we will owe about $450 in taxes before April 15 this year. I need that estimate of taxes due (or refund), since, as I recall, that’s about the only way to track if I’ve been accurate and complete as I progress through TurboTax.

 

 

Conclusion: I prepared two spreadsheet that display the lines on 1040 for 2025: one for married, joint filers and one for single filer. I can fill it out and get very close to what our 1040 should look like well before I get our final consolidated tax return from Fidelity. I provide the list that tells me where and when I can get the information I need. Most is from our year end brokerage statement.  

Nope. Inflation reported Tuesday shows a small uptick in inflation for December, but inflation over the last six months is not much different from prior months. Our annual rate of inflation is about 2.6%, and this is not much different than the last six-eight months. It’s not pointing to the Federal Reserve’s target of 2%, but one cannot conclude that it’s increasing.

 

I display a table and four graphs that I use to follow the trends in inflation. One that I normally include has not been updated since September.

 

 

Details:

 

The two most widely-reported measures of inflation are Seasonally-adjusted inflation and Core inflation.

 

Seasonally-adjusted inflation is the most widely reported measure of inflation. December inflation was higher than the average for October and November, and higher than nine of the prior 11. But the rate for last six months was at 2.8% annual rate; that’s the same rate as the prior four months. The 12-month rate is 2.7%.

 

 

Core inflation excludes volatile energy and food components. It’s a similar story to seasonally-adjusted inflation. The last six months run at 2.6% inflation, and the 12-month rate is 2.6%.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy is the measure of inflation that the Federal Reserve Board favors. I exclude this chart: it hasn’t been updated since September.

 

== History of 12-month inflation rates ==

 

Full-year inflation measured by CPI-U was 2.7%. That’s 0.1% less than last month. We’ve been bobbling around that rate for about 18 months.

 

 

I add a graph that shows the last three months have been below 0% inflation. The more volatile energy prices have declined over the past year. October, November and December in 2024 were also extremely low.

 

 

== Producer’s Price Index ==

 

This chart was updated this week through November. The six-moth rate is at 2.2% annual rate.

 

 

== Services ==

 

Inflation for services for the last six months average to 2.8% annual rate. The 12-month rate is 3.0%.

 

 

 

Conclusion: The inflation measures released this week for December were in line with past months. We have not seen much of an increase due to greater tariffs. Inflation runs at about 2.6%. We are not trending to the Federal Reserve’s goal of 2% annual inflation.

I like arranging the most recent calendar year returns in the 3 by 3 matrix of the Investment Style Box. I get a snapshot of what outperformed and what underperformed the US stock market as a whole. This post is a repeat of the prior two years. Real stock returns were far greater than their long run average or expected return rate. Large Cap Growth stocks beat the other eight squares in the matrix.

 

 

What this means for you: the winning tactic is to hold a bland, Total Market Index fund

 

• Ten years ago you could have chosen to overweight one of the boxes in the matrix. Only one in nine handily beat the returns of a Total Market Index fund. You would have clearly been wrong to overweight seven of the boxes. Keep it Simple. Don’t try to tilt your portfolio overweight a sector.

 

Details:

 

• The real return for US stocks of ~14% is the third year of double-digit real returns. We have put 2022 behind us. We are up about 25% from where we were at the end of 2021.

 

 

• Large Cap Growth again was the most attractive segment again. It’s been the leader for longer time periods. I show the style box for returns relative to US Total Market returns for 2025 and five, 10 and 15 years here.

 

== 2025 World stocks +22.1% ==

 

The total world market stock index, MSCI All Cap World Index was 22.1% for 2025. US stocks are roughly 60% of market value of all stocks in the world. Total International Stocks (VTIAX) were +32.2% in 2025. (Patti and I own the ETF of this: VXUS = +32.3%.)

 

 

Conclusion: 2025 was a terrific year for US stocks on top of two prior excellent years. The real return for US stocks was ~14%. That’s ~double the long run or expected return rate for stocks.

 

Every year some segments of the market outperform and some underperform. In 2025, the return for Large Cap Growth stocks again beat the other eight boxes in the 3 by 3 matrix that describes market returns.

 

Over a five, ten, and 15-year history, Large Cap Growth has outperformed all other styles. It’s basically the only box that has outperformed a Total Market fund.

Happy Holidays! Last week I went to a talk by Stu Hoffman, past chief economist from PNC. I think I’ve attended this event in all but one year out of the last ten or so. Here are the highlights of his prediction for 2026, barring major geopolitical events:

 

• The economy is good: expect 10% increase in corporate profits.

 

• Stocks accordingly should improve by roughly 10% – their long run average (including inflation).

 

• Bond interest rates will remain where they are and earn a few percentage points greater than inflation.

 

• Money market rates will be a bit lower and roughly match inflation: 0% real return.

 

Details:

 

Consumer spending is strong. Consumer spending is about 70% of our economy, so this is an important component. Spending is going in the opposite direction of the measure of consumer sentiment; Stu doesn’t put much faith in that measure.

 

Many will see lower taxes on their 2025 tax return and the amount that the IRS sends back to taxpayers for over withholding will be much more this year than in the past. They’ll have more to spend.

 

Unemployment is low and will remain low: it won’t go above 5% which is considered low. It’s 4.6% now.

 

Job growth will be okay. Stu thinks job growth will be less than the Federal Reserve forecast of about 55,000 new jobs/month. We have 1 million fewer in the workforce from low immigration and migration.

 

We have 180 million employed. Even a small error rate in the count results in swings and adjustments of employment. The annual number is revised in greater detail in January, and we may find there was no job growth in 2025.  

 

The Federal Reserve will lower interest rates at least two times in 2026. The ten-year US Treasury bond interest rate will remain roughly where it is now, about 4.1%. Bonds prices won’t change much: expect 4% total return.

 

Inflation will fall to less than 2.5% in 2026 and keep falling in 2027. The current level of tariffs is about 11% on average; we are still working through the final effects, and they may settle at 12% or 13%. They are half of Trump’s initial proposal of 25% tariffs.

 

Economic growth (GDP) will be okay. We have no prospects for a recession. Stu thinks GDP growth will be less than 2%. The Federal Reserve forecasts 2.3% GDP growth for 2026.

 

 

Conclusion:  I attended a talk by Stu Hoffman, former chief economist for PNC. Here are the highlights:

 

Expect stocks to return 10% and bonds to return about 4% in 2026. Our economy is good. We will not have a recession. Expect corporate profits to improve 10%. Expect inflation to fall. Expect interest rates to remain steady.

Wow! Inflation reported for October + November was REALLY LOW. We have not had two months with inflation this low in the last +five years.

 

I display a table and graphs that I use to follow the trends in inflation. One that I usually include has not been updated since September.

 

 

Details:

 

The two most widely-reported measures of inflation are Seasonally-adjusted inflation and Core inflation.

 

Seasonally-adjusted inflation is the most widely reported measure of inflation. Oct + Nov averaged inflation of 0.10% per month. Inflation for the last six months was at 2.7% annual rate. This is the same as the 12-month inflation rate.

 

 

Core inflation excludes volatile energy and food components. Oct + Nov averaged 0.08%. The last six months ran at 2.6% inflation. This is the same as the 12-month inflation rate.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy is the measure of inflation that the Federal Reserve Board favors. It’s similar to Core inflation, but tends to run a bit lower over time. We have no updates on Oct + Nov. This data is through September. One would expect Oct + Nov to be similar to the two months for core inflation.

 

 

== History of 12-month inflation rates ==

 

Full-year inflation measured by CPI-U was 2.7%. That’s 0.1% greater than last month.

 

 

I add a graph that shows this Oct and Nov averaged to -0.10% and replaced very low months of a year ago. December of last year was also very low.

 

 

== Producer’s Price Index ==

 

We don’t have data for Oct or Nov. No graph.

 

== Services ==

 

Inflation for services for Oct and Nov was low. The last six months average to 2.8% annual rate. The 12-month rate is 3.0%.  

 

 

 

Conclusion: The inflation measures released this week for October and November were much lower than expected. We have not seen two months with inflation this low for +five years.  Inflation runs as about 2.7%. similar to the rate for the past year or so.

I’ll use this spreadsheet to track how well our portfolio is doing for our calculation year ending November 30, 2026: will we calculate to an increase in our Safe Spending Amount for 2027? (SSA. Chapter 2, Nest Egg Care [NEC]) If you use this date, you can use this spreadsheet. This spreadsheet is a lot simpler than ones I’ve provided in the past.

 

Details:

 

You will enter your age-appropriate Safe Spending Rate (SSR%, Chapter 2, NEC) you used this year and the one you’ll use next year. You’d adjust the cells in the blue column for your weights and mix of US vs. international and stocks vs. bonds.

 

I update this chart on the first of each month. The return data from Morningstar for the prior month and year-to-date are accurate on that date. I get data from the table on the performance tab for each of our securities.

 

== We need 0.35% real return!? ==

 

The calculation for Patti and me shows we will calculate to a real return in our SSA with a 0.35% real portfolio return.

 

 

What the heck! Why so little for us?

 

1. We all just calculated to a real increase in our Safe Spending Amount (SSA, Chapter 2 Nest Egg Care [NEC]). That means all of us assume we are just beginning to ride along on the most harmful sequence of stock and bond returns in history.

 

2. If our age-appropriate Safe Spending Rate does NOT change for the calculation next year, we’d have to earn back more than the amount we withdrew for our spending this year to calculate to a real increase next year. If we earn back all that we withdrew,  we obviously didn’t start on a most harmful sequence of returns. Our real return rate has to be slightly greater than the percentage we withdrew.

 

Patti and I don’t have to earn back all that we withdrew, because our age-appropriate Safe Spending Rate use for our calculation next November 30 increases. We need less portfolio value for the same SSA when we calculate with the the greater SSR%. We withdrew 5.50% and ur SSR% increases by 5.50% [(5.80%-5.50%)/5.50%)]. The math works out that we need a bit more than 0% real return to calculate to a real increase next year.

 

SSR%s increase over time for the same reason our RMD percentages increase over time: our retirement period – life expectancy – is shrinking.

 

 

Conclusion. This post gives you a spreadsheet you can use to track to see if you will earn a real increase in your Safe Spending Amount that you’ll calculate a year from now. Patti and I need a small real return in our portfolio – less than 1% – because I’ll use a 5.5% greater SSR% for the calculation next year.