2022 - one of the worst years ever...
While the S&P 500's 18.1% decline was painful, it was only the fourth-worst stock market year in the last 50 years, only half as bad as the 37% decline in 2008, and better than the 22.1% decline in 2002 and 25.9% decline in 1974.
Yet in each of those modern stock market routs, the value of 10-year Treasuries rose in conjunction, balancing out the losses in the stock market. However, those who were trying to limit volatility in a 60/40 portfolio in 2022 had a total loss of 18%.
That was the worst performance for the 60/40 portfolio dating back to 1937 when the 60/40 portfolio declined 20.7%, and the third worst in modern history (The worst was in 1931, with its 27.3% decline, as can be seen in following table):
So eventually the bond rout led to the worst returns for a 60/40 portfolio since 1937
As a reminder: Everything looked even worst in August and September 2022, but Q4-2022 was a strong turnaround in the equity markets. The following headline was published online at the End of August 2022:
But to come to a record-reading, let's take the official INFLATION-numbers also into account
when calculating the annual return:
Using all the same constraints I have, except inflation, the website A Wealth of Common Sense calculated that the drop in stocks and bonds was the third worst year for a 60/40 portfolio since the 1920s. First and second place go to the Great Depression's 27% and 20%.
To this, we compare our 60/40 portfolio's performance of -17%.
Not quite as bad, but still in third place, right?
But wait, what about the 7% inflation Americans experienced in 2022? That'd make their real return -24%. Still only in second place? Not once you adjust for deflation during the Great Depression…
According to the Minneapolis Federal Reserve, US inflation in 1931 was -8.9%.
No doubt this sounds apocalyptic... if you have an education in economics and your spouse does the shopping. For the rest of us, falling prices are quite good. They left US 60/40 investors with an 18% loss in real terms in 1931, for example.
Which is a lot less dramatic than the inflation-adjusted 24% losses of 2022.
LAST (but not least), or:
Let's end this piece on a good note :-)
When both stocks and bonds decline, here's what happens next; Since 1928, there have been only four other years in which both the S&P 500 and the 10-year Treasury bond each fell in value.
So how do these assets usually perform the following year? Fortunately, the record looks pretty good:
We came into the year 2023 and as history suggested a tolerable Minus 8% had to be expected if everything would go down again..
But eventually we are now sitting here now (12th April 2023) on an S&P 500-level of ca. 4,100 points.
Pretty neat :-)
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