Never as then, amid suicides, hysteria, and groups of fainting people,
have I felt the sensation of real death, death without hope..." - Federico Garcia Lorca, October 1929.
What's the worst that's likely to happen to our investment portfolios? Honestly, no one can say. But armed with knowledge of the worst U.S. portfolio disasters that have happened over the past century, we are perhaps better prepared for the financial shocks of the future. This post briefly compares the performance of different stock/bond mixes during the Great Depression of the 1930s, the oil price and inflation shocks of the 1970s, and the Tech Crash & Financial Crisis of the 2000s.
Technical note: In the three charts below, each portfolio's performance is indexed to the pre-crisis market peak. All returns are geometric total returns, inflation-adjusted, with dividends reinvested. Each chart is drawn to the same scale, with black circles showing the point at which each portfolio permanently regained its real pre-crisis value.
1. The Great Depression of the 1930s
The Depression Era performance of stocks and bonds is widely known. Stock-heavy portfolios dropped up to 75% over 3 years and took 12-15 years to finally regain their real value (chart below). Due to strong deflation, especially in 1931-33, bond-heavy portfolios regained their real value within just 4 years, with modest positive returns over the period.
Note: The 100% stock portfolio did briefly dip below its 1929 high several times during 1948-49.
Sources: Monthly S&P stock returns from Shiller; monthly 10-year Treasury returns from Medium
The real price of imported oil in the U.S. increased 6-fold in the 1970s, leading to runaway inflation and stagnant economic growth. Initially, stock-heavy portfolios were hit the hardest, declining up to 50% within 18 months (chart below). Later, as inflation accelerated, bond-heavy portfolios suffered as well, declining up to 40% by 1981. Once inflation subsided, the various stock/bond mixes all regained their previous real values more or less together after 12 years.
3. The Tech Crash & Financial Crisis of the 2000s
As you perhaps know well, the 2000s saw both the collapse of the dot.com bubble and an international banking crisis. Stock-heavy portfolios declined up to 40%-50% in both events and did not permanently recover their real pre-crisis values for 10-13 years (chart below). Due to declining interest rates and flight-to-quality, bond-heavy portfolios barely suffered during the period, but with modest returns.
PS. Many thanks to Forum member siamond for instruction on the use of geometric rather than arithmetic total returns.