• Home
  • About
  • Services
  • Contact
  • Media

The Bear Ate [Some of] My [Diversified] Portfolio

Posted December 18, 2013 by Denis Smirnov

In the last post we looked at annual declines in the domestic stocks (The Bear Ate My Portfolio).  Let’s see what happens when we add foreign stocks and bonds to the portfolio mix.

First off, I added a new metric to the table – Total Years.  It calculates the number of years that the investment was “dead money” or how long it took to get back to even including both the decline and the subsequent recovery.  To refresh the memory, Exhibit 1 has the numbers for domestic stocks only.

Exhibit 1 – Recent Bear Markets (S&P 500)

5-1

Exhibit 2 looks at how the numbers change if we add foreign stocks (represented by MSCI EAFE index).  To be clear – we are analyzing the portfolio mix for the years when S&P 500 alone had negative returns.  The results are fairly similar to the original.  The biggest difference is that one of the mildly negative years is eliminated (0.4% return in 1977).  This reduces that average duration numbers but actually increases that drawdowns for the last two episodes.

Exhibit 2 – Recent Bear Markets (70% S&P 500 / 30% MSCI EAFE)

5-2

Next table goes a step further and adds domestic investment-grade bonds to the portfolio (Barclays US Aggregate Bond Index).  Results for the 40% domestic stocks / 20% foreign stocks / 40% bonds are show in Exhibit 3.  Two of the periods are eliminated (1977 and 1981), while the other drawdowns become much milder and easier to recover from.

Exhibit 3 – Recent Bear Markets (40/20/40)

5-3

Key Takeaways

The analysis above is just another way of showing that adding bonds to the portfolio reduces its volatility.  This, of course, comes at the price of lower long-term returns.  Thus, investors should construct their portfolios based on the individual risk tolerance and time horizon (how long they can afford to be in “dead money” period without locking in losses).

P.S.

As an aside, I wanted to take a look at how the all-domestic stock portfolio fared during the Great Depression.  As you can imagine, it was a rather difficult period for stock investors (Exhibit 4).  Starting in 1929, the initial drop through 1932 was 64.2% and required a whopping 180% return to break even.  It took another four years to do that resulting in an eight-year period of “dead money”.  Additionally, another leg down started in 1937 and didn’t recover until 1943.  So with the exception of a brief positive blip, the market stayed under water from 1929 to 1943 or full 15 years!  Of course, that was the absolutely worst investing period in the modern era and it’s not likely to be repeated any time soon.

Exhibit 4 – Great Depression Market Performance

5-4

Share this:

  • Facebook
  • LinkedIn
  • Twitter
  • Pocket
  • Email

Sign up to the newsletter

Categories

  • Bear Markets
  • Bonds
  • Economy
  • Education
  • Financial Planning
  • Indexing
  • Investing
  • IPO
  • Retirement
  • Taxes
  • Uncategorized
  • Valuation

Archives

  • January 2023
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • May 2022
  • April 2022
  • February 2022
  • January 2022
  • October 2021
  • September 2021
  • July 2021
  • February 2021
  • January 2021
  • November 2020
  • October 2020
  • September 2020
  • July 2020
  • June 2020
  • May 2020
  • March 2020
  • February 2020
  • January 2020
  • November 2019
  • October 2019
  • September 2019
  • July 2019
  • May 2019
  • February 2019
  • January 2019
  • December 2018
  • October 2018
  • September 2018
  • July 2018
  • June 2018
  • May 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • October 2013
About
  • Background
  • Who We Are
  • The Gordian Knot
Services
  • Services
  • Planning Process
  • Investment Philosophy
Contact
  • Contact Details
  • Inquiry Form
  • Map
Media
  • Articles
  • Blog
  • Reviews
Dave
Denis
 
 
 
 

Gordian Advisors Financial Planner

Office: 2200 E. River Rd., Suite 109, Tucson, AZ 85718

Phone: 520-615-2779

Email: info@gordianadvisors.com

Download Form Form CRS Client Relationship Summary

Download Form ADV Disclosure Brochure

Gordian Advisors may only transact business or render personalized investment advice in those states where we are registered, or have filed notice, or are otherwise excluded or exempted from registration requirements. Material discussed is meant for general illustration and/or informational purposes only, and is not to be construed as investment advice. Nothing on this web-site should be interpreted to state or imply that past results are an indication of future performance. Although this information has been gathered from sources believed to be reliable, please note that individual situations may vary. Therefore, any information should be relied upon only when coordinated with individual professional advice.