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Max drawdown data for different AA

Posted: Fri Feb 22, 2019 11:08 pm
by StoneFeeler
Hi,

I am new to the forum and trying to learn. I wanted to understand the max drawdown for different AA and came across the below table in the Wiki (https://www.bogleheads.org/wiki/Risk_tolerance):

Asset Allocation %
(Stock/Bond) Exposure to
Maximum Loss
20/80 5%
30/70 10%
40/60 15%
50/50 20%
60/40 25%
70/30 30%
80/20 35%
90/10 40%
100/0 50%

But this data is based on the 1970s bear market. Is there any similar data for bear markets before the 70s and after? It would be ideal if the data is in both nominal and real terms.

Thanks

Re: Max drawdown data for different AA

Posted: Sat Feb 23, 2019 8:09 am
by Silk McCue
I don't think other time periods are necessary as a comparison as they deal with a real world example of a significant bear market. Its about risk tolerance in the face of serious market decline in general. Also, real and nominal are of no consequence because percentages apply equally to both.

Cheers

Re: Max drawdown data for different AA

Posted: Sat Feb 23, 2019 8:16 am
by livesoft
That is not data. One can tell because all the numbers are so nice.

Here are some links to data:
https://paulmerriman.com/fine-tuning-tables-2018/
But once again, the data starts in 1970. It probably starts then because one could not really buy index funds earlier than that nor invest readily in a collection of investments to mimic the index.

I am unconcerned myself that the data starts in 1970, but it does go through 2017. Thus it covers "bear" markets after 1970.

Re: Max drawdown data for different AA

Posted: Sat Feb 23, 2019 9:29 am
by dbr
If your objective is to produce a probability distribution of possible future drawdown events, I don't think there is enough historical data to get a picture any better than to assume the probable worst cases are around 50%. I think the actual worst case would be the 1929 crash which was around a 90% loss by 1932. I have no idea how to predict the probability of a crash that size happening again.

Here is a list of historical crashes in the US https://en.wikipedia.org/wiki/Stock_mar ... ted_States


All of the US market crashes recovered as the stock market went on to deliver large returns on average over time. That is not true of all stock markets including those that lost everything and never recovered, usually due to massive political disruption. For example the Russian stock exchange disappeared at the time of the Bolshevik Revolution and stocks did not exist in the Soviet Union.

Re: Max drawdown data for different AA

Posted: Sun Feb 24, 2019 11:02 am
by paul merriman
The expected drawdowns will vary with different combinations of asset classes. If you wish to compare the maximum drawdowns on combinations of S&P 500 and bonds, worldwide equity combinations with bonds, and all value equity portfolios with bonds check out
https://paulmerriman.com/fine-tuning-tables-2018/

The tables also show the worst 3, 6,12, 36 and 60 months periods from 1970 through 2017. Updated tables will be available in the next month.

Re: Max drawdown data for different AA

Posted: Mon Feb 25, 2019 12:38 am
by StoneFeeler
Thanks for the links. I will check them out.

My objective to starting this thread is as follows: I thought the most important consideration in deciding AA ought to be the percentage loss that one is willing/able to withstand if something hits the fan. That's why I was looking for some data on the max drawdown for different AA combinations. So if there is a table for the max drawdown for each big "bear market", it would be educative.

Re: Max drawdown data for different AA

Posted: Tue Feb 26, 2019 4:37 am
by StoneFeeler
paul merriman wrote:
Sun Feb 24, 2019 11:02 am
The expected drawdowns will vary with different combinations of asset classes. If you wish to compare the maximum drawdowns on combinations of S&P 500 and bonds, worldwide equity combinations with bonds, and all value equity portfolios with bonds check out
https://paulmerriman.com/fine-tuning-tables-2018/

The tables also show the worst 3, 6,12, 36 and 60 months periods from 1970 through 2017. Updated tables will be available in the next month.

Paul,

I checked out the tables. Very useful. One question - do they reflect the change in the index values only or do they include dividends? Also, are these nominal or real?

Thanks

Re: Max drawdown data for different AA

Posted: Tue Feb 26, 2019 7:00 am
by Silk McCue
StoneFeeler wrote:
Tue Feb 26, 2019 4:37 am
Paul,

I checked out the tables. Very useful. One question - do they reflect the change in the index values only or do they include dividends? Also, are these nominal or real?

Thanks
They reflect nominal return and reinvested dividends.

In my experience only people selling index annuities use the index values to mislead people about potential upside.

Cheers

Re: Max drawdown data for different AA

Posted: Tue Feb 26, 2019 9:48 am
by dbr
StoneFeeler wrote:
Mon Feb 25, 2019 12:38 am
Thanks for the links. I will check them out.

My objective to starting this thread is as follows: I thought the most important consideration in deciding AA ought to be the percentage loss that one is willing/able to withstand if something hits the fan. That's why I was looking for some data on the max drawdown for different AA combinations. So if there is a table for the max drawdown for each big "bear market", it would be educative.
If you adopt the idea of need, ability, and willingness to take risk in investing, then max drawdown is an element in assessing your willingness to take risk. It is not unimportant, but the whole picture involves far more than that.

Re: Max drawdown data for different AA

Posted: Thu Mar 14, 2019 7:08 am
by StoneFeeler
Silk McCue wrote:
Tue Feb 26, 2019 7:00 am
StoneFeeler wrote:
Tue Feb 26, 2019 4:37 am
Paul,

I checked out the tables. Very useful. One question - do they reflect the change in the index values only or do they include dividends? Also, are these nominal or real?

Thanks
They reflect nominal return and reinvested dividends.

In my experience only people selling index annuities use the index values to mislead people about potential upside.

Cheers
I had some other questions about Paul Merriman's tables. I contacted him directly by email and he replied extremely promptly. Much appreciated!

Here are some of his clarifications for those who may benefit from them:

1. All returns are nominal
2. All international returns converted to USD
3. The return of all the asset classes include the reinvestment of dividends but not corrected for taxes
4. The bond used is 5 year U.S. Treasury Note
5. The total return for the bonds is a combination of interest and change in market value
6. The international stock portfolio is a combination of all the equity asset classes discussed in the article, "The Ultimate Buy and Hold Strategy". Those include the same large, small, value, growth asset classes in the U.S. markets, plus a percentage in emerging markets.

Hope this helps!