Draw downs for investors to start the year have been challenging to say the least. For a segment of investors it has been historically bad. Traditionally categorized as conservative to very conservative investors have seen some of the worst draw downs in history (20% to 40% equity/60% to 80% fixed income).
Usually in times of poor equity performance, governments lower interest rates to help relieve the economy. When interest rates are going lower, fixed income investments act as a ballast; stabilizing the portfolio as equities fall. Right now things are different. High inflation is forcing governments to raise rates from an extremely low base. Rate hikes, high inflation, and a worry of a slowing economy have led to fixed income investments and equities falling at the same time.
For context, the worst draw down in a very conservative portfolio going back to 1990 was -6.8% (Feb 1994 to June 1994). At the time of writing, year to date the typical very conservative portfolio is down approximately double that at -12.64% year to date. For investors with slightly more equity than very conservative, the worst draw down since 1990 was -14.8% during the great financial crisis (June 2008 to February 2009). Year to date a similar portfolio is down -13.79%.
The most common diversified portfolio (60% equity/ 40% fixed income) is also seeing unprecedented draw downs to start the year. If the year were to end today a typical balanced portfolio would be down -15.69%. The third worst year on record going back to 1928.
Ben Carlson writes a blog called A Wealth of Common Sense where I pulled the following data and comments from:
“Many of the worst years for a 60/40 portfolio are the same as the worst years for the U.S. stock market, which makes sense since the 60 carries more risk than the 40 in this equation. The current 20% and change loss in the S&P 500 year-to-date would be the sixth-worst calendar year return since 1928 which includes the great depression, right now it’s even worse for the 60/40.
Since bonds are having their worst year on record along with a large correction in the stock market, this year is currently on par with 60/40 returns in 2008 and the 1930’s. Not the kind of company you want to keep.
Of course, we’re only 5 and a half months into the year. Even if the year were to finish where we are right now (or worse), it’s just one year. You should expect to have bad years when investing because investing is not always easy in the short-term. What about the longer-term returns (the only ones that really matter)?
These are the worst 5 year returns for a 60/40 portfolio:
Four times over a 5 year period a 60/40 portfolio has been negative, all occurring in or around the Great Depression.
Now let’s go out 10 years:
By my calculations, there has never been a negative return over 10 years for a 60/40 portfolio as of a calendar year-end. Could it happen? Absolutely. There is no such thing as always or never in the financial markets, but that’s a solid track record.
How about one more?
Here are the worst 20 year returns:
As with most worst-case historical performance numbers, the starting point for the bottom of the barrel was 1929 (Great Depression). It is interesting the years ending 2018 and 2019 are on this list. The height of the dot-com bubble was not a terrific entry point either.
It’s worth pointing out that the range of annual returns for the worst 20 years listed here for a 60/40 portfolio is 3.4% to 6.0%.
I’m not accounting for fees or taxes or inflation here but this is still pretty good for a worst-case scenario, right? I wonder how many investors would sign up for a guaranteed 6% per year for the next 2 decades right now.
Past performance is not indicative of future returns, but sometimes it is helpful to zoom out a little bit when you’re in the midst of a terrible year. Extending your time horizon remains one of the most powerful investment strategies when all else fails.”
If you have any questions or would like to discuss the topics mentioned in this blog, please do not hesitate to reach out here.
To receive notifications when we post new content, sign up for our reading list here.