You've probably heard that 1994 was not a good year for fixed income investing. But do you know just HOW bad it really was?

This is not an exercise in masochism. It's an exercise in perspective. The inescapable fact is that 1994 was an exceptionally terrible year for fixed income investors. Only one year, since 1926, was worse. That was 1967, the year Guns and Butter collided and 20 year Treasury bonds provided a total return ( interest plus change in market price) of MINUS 9.2 percent.

Last year the figure was minus 7.8 percent. In a single year, the bond investors of 1994 lost more money than bond investors lost in the only four year bond bear market in history--- the period from 1977 to 1980.

Losses on Treasury bonds don't happen very often. In the last 68 years, according to data from Dimensional Fund Advisors, there were only 19 years in which you would have lost money. In 8 of those years your loss would have been less than 2 percent. The table below shows the distribution of returns over this 68 year period and the specific years when total returns were negative.

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These periods of loss are the occasions people tend to forget about when risk is discussed. "People have gotten somewhat numb to risk.", Jack Brennan, President of the Vanguard Group, said in a recent interview.

"If you look at the growth of the mutual fund industry--- up from about $200 billion to $2.3 TRILLION from the eighties to the present--- every bit of $2 trillion has joined us during a major bull market. Looking at the figures for returns on stocks, bonds, and Treasury bills, only 3 of the 39 possible observations had negative returns. There was one down year in stocks. And two in bonds. And there were only five times when the total return failed to beat inflation.", he said. ( The figures are shown in table 2, below)

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What we are looking at here is an exceptionally BAD year set in an exceptionally GOOD period that gave investors artificially high expectations... and then crushed them. Those who are about to throw out the investment bathwater would be well advised to check carefully for babies.

Many investors aren't. Figures from the Investment Company Institute show that fixed income mutual funds started suffering from net redemptions--- more shares being redeemed than being purchased--- early last year. While those who sold in February of 1994 can be credited with good decision making, their numbers are overwhelmed by the number of people redeeming their shares AFTER the damage of rising interest rates had already occurred. While long rates may still rise, the actual figures show that long term interest rates appear to have peaked in November at just over 8 percent. They have been declining, very slowly, ever since.

The "Bond and Income" fund segment, as defined by the Investment Company Institute, includes funds that invest in: government securities , GNMA, global, corporate, high yield, municipal bonds, mixed, balanced, and flexible portfolios. While net redemptions for the entire collection did not begin until late in the year, net redemptions started in February, 1994 for government securities funds, GNMA funds, and municipal bond funds.

"Bonds are counter-intuitive.", Mr. Brennan said. "People won't touch them today." Mr. Brennan clearly feels that's a mistake.

"You can get a 7.6 percent yield in Treasuries today. That's a good return. The forecast rate of return for common stocks is about 8 or 9 percent. I think Treasuries are an awfully attractive place to invest."

Millions of fixed income investors, however, won't have any part of it because they've been burned in the last year with their mutual fund investments.

Perhaps they should reconsider. While much of the misery of 1994 came from a simple, RARE, interest rate change, an increasing body of evidence shows that fixed income mutual funds haven't delivered what they have promised.

(More about that on Sunday.)