Saturday, March 10, 2012

How low can the stock market go?

At the Bogleheads Forum, I see they are playing around with the idea of how far the stock market can drop. Thank you to Taylor Larimore of Bogleheads for starting a thread about this issue.

Since I have some international data on this, I thought I'd have a look.

This is annual data from the Dimson, Marsh, Staunton Global Returns Dataset. The drawdowns from peak to trough may be even bigger with monthly data, but the best I can do is to look at annual data. These numbers are also the inflation-adjusted returns, which I find more interesting.  This is total returns data, which includes reinvested dividends. WWI and WWII account for some, but not all, of these outcomes. What I am listing is country name, years (beginning of the first year to end of the second year), and the percentage drop in real terms for the stock market...

Australia 1970-74  -66%
Belgium   1929-34  -65%
          1942-48  -79%
Finland   1917-21  -85%
          1943-48  -74%
          1989-91  -60%
France    1943-50  -88%
Germany   1914-31  -84%
          1948     -91%
Ireland   2007-08  -75%
Italy     1913-21  -68%
          1944-45  -85%
          1974-77  -75%
Japan     1946     -86%
          1940-47  -98%
          1990-02  -70%
N Zealand 1987-90  -73%
Norway    1917-21  -74%
          1973-78  -73%
Spain     1936-50  -56%
          1974-82  -84%
Switzerland 1915-1921 -73%
US        1929-31  -60%
UK        1973-74  -71%

I am only looking at the 19 developed market countries in the dataset, with data going back to 1900. But if you went back to 1900 and tried to put together a list of "developed markets" for the 20th century, you might have included Argentina, Russia, China, etc. As those countries never made the dataset, even these results have some "survivorship bias" in them.

While I have noted that it is rather expensive to build a relatively safe TIPS bond ladder for retirement when interest rates are low, the results I am showing here do help to highlight that stock markets are risky and that time diversification is no panacea for investors.