Ben Mathew wrote: ↑Tue May 11, 2021 7:31 pm
I use Shiller's dataset to see how a 35/65 portfolio weathered stock market crashes. Shiller's data covers 150 years from 1871 to 2021. I converted Shiller's monthly data to annual data before doing the analysis.
Here's the real growth of $1 in 1871:
Stock is S&P 500 including dividends.
Bond is 10 year US Treasury bond, held for a month and then rebalanced back to 10 year duration every month. Includes interest and price changes.
35/65 portfolio is rebalanced annually.
There are 7 notable stock market crashes over the last 150 years. Cumulative stock market loss
World War I (1916-'20): -41%
Great Depression (1929-'31): -53%
1937 Recession (1937-'41): -39%
Post World War II (1946-'47): -31%
Oil Crisis (1973-'74): -46%
Tech Crash (2000-'02): -39%
Subprime Crisis (2007-'08): -39%
The worst was the Great Depression at -53%.
Cumulative loss of a 35/65 portfolio during these crashes:
World War I (1916-'20): -38%
Great Depression (1929-'31): -4%
1937 Recession (1937-'41): -12%
Post World War II (1946-'47): -25%
Oil Crisis (1973-'74): -25%
Tech Crash (2000-'02): 3%
Subprime Crisis (2007-'08): 1%
Interestingly, the zagging of bonds in a 35/65 portfolio would have erased stock losses during the Great Depression, the Tech Crash and the Subprime Crisis. It would also have reduced the impact of the 1937 recession (-39% reduced to -12%) and the Oil Crisis (-46% reduced to -25%). The worst period for 35/65 was World War I (-38%) when bonds did poorly. Bonds also didn't help much in the post World War II crash (-31% reduced to -25%).
For investors with a balanced 35/65 portfolio, the worst period was not the Great Depression but World War I.
There's also an interesting period from 1977-'81 where the stock market loses only 10%, but 35/65 portfolio does badly (-26%) because of bonds (-35%).
Shillers data is from his spreadsheet "US Stock Markets 1871-Present and CAPE Ratio," available
here.
My spreadsheet with this analysis
here.
Apologies for posting so late in this thread. It was almost done firing just before I joined BH, and I overlooked it until the namajones post today.
There is a problem with generating returns from the Shiller dataset. Let me explain.
First, there’s no problem with the Shiller stock returns. I beat on the underlying Cowles data, going back to the source in the Commercial & Financial Chronicle, and after months of exacting scrutiny and correction of survivorship bias, the fruit of my labor was barely to lower annualized returns 1871 to 1897 by a dozen basis points. De nada.
But the bond returns posted by Shiller are mis-specified (that’s academese for FUBAR). There was no regular issue of 10-year Treasuries until the 1970s. The bond returns tabled by Shiller are something else entirely. See this thread / post for the messy details:
viewtopic.php?p=6131409#p6131409
In short, any bond portfolio that a BH retiree would have bought, had such a one existed in the latter decades of the 19th century, would have returned rather more than what Shiller’s data shows.
Therefore the balanced fund results undershoot what would have been achieved in the years prior to 1914.
Conversely, the OP is absolutely correct about the vicissitudes surrounding WW I. It was a bad, bad time to be an investor, with US inflation briefly worse than around the Civil War, with real returns suffering to match. And if you were a US investor with a global balanced fund, 1910 was about the worst stretch in history to retire and begin making withdrawals (it’s not called the Great War for nothing).
On the other hand, although the Panic of 1873 has an honored place among the
crises nommées (along with 1819, 1837, 1857, 1893, 1907, and 1921), on a real total return basis (as opposed to a Main Street suffering basis), it just wasn’t that bad for the buy-and-hold investor. High dividends for reinvestment, plus deflation, kept real returns relatively sweet, especially for an investor who “stayed the course” through 1879, the approximate equivalent then of 1982-83 more recently.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.