My previous post tallied up all the cases of stock market drops greater than 50% in inflation-adjusted terms for the 20 countries included in the Dimson, Marsh, Staunton Global Returns Dataset.
Since then, I've come to realize that it is important to show the same type of table for bonds. This is a reminder about William Bernstein's idea of deep risk as bond investments can also cause a permanent loss of capital (as, for instance, German bond holders in 1899 would still be waiting for their investment to provide as much inflation-adjusted wealth as they held at that time).
The table below shows all the cases in which stocks and bonds lost more than 50% of their value in inflation-adjusted terms. It's hard to quantify whether stocks or bonds were "more risky" based on the table, but there were plenty of cases in which investors took significant hits with both types of investments. Historically, there have been some very severe bond bear markets.
A major problem for bonds in the past world experience was inflation. And a valid question remains, will inflation-protected bonds now available to investors help to solve this problem? Though I have written in the past about concerns that TIPS are not a completely safe investment, my personal bond investments are split between I-bonds and Vanguard's TIPS mutual fund. The TIPS ladders for retirement income would also seemingly help investors avoid the types of bond losses highlighted in the table below.
The table shows the country name, years (beginning of the first listed year to end of the second listed year), and the percentage drop in real terms for the stock or bond market over that period. I also provide the year that the real stock or bond market value would again exceed the level prior to the market drop, as well as the number of years it took for this to happen.
Finally, let me add another table rather than extending this discussion into a third blog post. This table shows the results for 50/50 annually rebalanced portfolios of stocks and bonds in all of these countries. As can clearly be noted, diversification does help! Nonetheless, relying solely on volatile investments of stock and bonds funds does still pose threats. Risk is real.