Stocks and bonds continue to plummet, and there appears to be no end to the misery. The S&P 500 is down 9.6%; bonds have dropped 9.8%. As bad news mounts, can you lose all your money from stocks or bonds? The odds are pretty low if you diversify your assets across classes, sectors, and countries.
Since 1926, a 60% stock and 40% long-term government bond portfolio averaged 9.16% per year, but it has not been without blemishes. During the Great Depression, it lost 45%, and in 1974 it fell 14.13%, it dropped 11.85% in 2008.
You can reduce your risk and downside By adding more components to your portfolio. Adding small-cap stocks, international holdings, and real estate investments to a portfolio decreased the downside from 44% to 36%.
Here is a look at some asset categories and their worst investment years.
- Large-cap stocks lost 66% in 1932.
- Small-cap stocks lost 67% in 1932.
- Mid-cap stocks lost 43% in 1982.
- International small-cap stocks lost 53% in 1985.
- International developed stocks lost 50% in 1985.
- Emerging markets lost 51% in 2009.
- Real estate holdings lost 61% in 2009.
- Government bonds lost 4.5% in 1981.
As I mentioned, the 60/40 portfolio lost 45% during the Great Depression, but from 1932 to 1936, it rebounded by 91%. After the 1974 decline, it climbed 47% from 1975 to 1976, and it soared 102% from 2009 to 2017 following the Great Recession.
Will you lose all your money from a diversified portfolio of mutual funds or ETFs? I doubt it. Actually, if history is our guide, buying investments when they’re down has been financially rewarding if you are patient.
I don’t know when stocks and bonds will recover, but it will happen eventually. In the meantime, follow your plan and diversify your assets.
April 221, 2022
Note: Past performance is no guarantee of future performance.
Data Sources: Dimensional Fund Advisors Returns Web and YCHARTS.