They say we like to scare ourselves. When it comes to our finances I doubt that’s true, but there are still times when Mr Market slashes at our investments like Freddy Krueger at a couple of horny teenagers.
It’s time to face our fears. The best way to stop yourself panicking like a hapless American virgin on a camping trip is to know just how bad things can get.
Our recent investigations into risk tolerance [1] tell us how much carnage we think we can take.
But how much might we have to take?
Let’s roll the tape and take a look at investing’s scariest horror shows.
Scream!
The UK stock market’s biggest bloodbath was a real return loss of -71% from 1972 to 1974 [2]. It wasn’t until 1983 – 10 years later – that the market recovered its former value.
If that seems like ancient history, well, the FTSE All-Share was cut down by -33.4% in 2008.1 [3] Recovery took a mercifully short two years.2 [4]
And you only have to go back a few more years before that for A Nightmare on Threadneedle Street 3: the -40% loss between 1999 and 2002.3 [5] Recovery took three years.
Hellraisers
There’s no denying the that the 1972-74 UK stock market crash [6] was horrendous. But we can find even worse if we look at the returns from other markets [7] around the world.
Japan lost -98% between 1943 and 1947. Recovery took 26 years. That’s an investing lifetime.
More infamously, Japan sunk -71% from 1990 to 2002, and it has yet to recover.
The biggest non-war shocker? That would be Spain’s -84%, between 1974-1982. It took them 22 years to finally get back to square one in 1996.
Meanwhile the Great Recession hacked -75% from the Irish stock market between 2007 and 2008. Recovery ongoing.
The longest ever recovery was the 89 years it took Austria to come back from its -96% 1914 to 1925 trauma. The breakthrough finally came in 2003. The great-grandchildren must have been delighted.
The worst fright visited upon the US was a comparatively mild -60% during the first leg of the Great Depression, 1929 to 31. It took seven years to recover.
The US took another -57% hit 2007 to 2009 [8] and went down -49% in 2000 to 2002.
But perhaps none of that is as scary as the slow torture inflicted on UK bonds over 27 years from 1947 to 1974 [9]. The total real return loss: -73%.
The recovery date? 1993, a spine-chilling 46 years later.
The ultimate horror is of course the total wipeout of Russian stock and bond holders in 1917 and Chinese investors in 1949. There was no coming back from that.
Scream too
Thankfully the bogeyman doesn’t lop huge chunks out of us that often.
In the UK, the historical returns [10] data shows we took heavy losses in calendar years about one year in every ten between 1899-2014:4 [11]
- 10 years have ended with a decline of over 20%.
- Four years have ended with a loss of over 30%.
- One year ended with a loss of over 50%.
The frequency of losses of 20% or more rises to one in seven years [12] in the US, according to passive investing demon-slayer, Larry Swedroe.
Even a portfolio diversified across the developed world will be gored frequently according to this analysis [13] of the biggest falls from the monthly peak in the MSCI World Index from 1970-2016 by Ben Carson.
| Date | Loss |
| 1970 | -19% |
| 1973-74 | -40% |
| 1982 | -17% |
| 1987 | -20% |
| 1990 | -24% |
| 1998 | -13% |
| 2000-02 | -45% |
| 2007-09 | -54% |
| 2011 | -26% |
| 2015-16 | -20% |
| Average bear market |
-28% |
Source: A Wealth Of Common Sense [13]
By the light of the historical record, it’s clear we’re going to take pain every few years. In any given year, global equity returns have only been positive 60% of the time.5 [14]
Even a global portfolio, balanced 50/50 between equities and bonds, was splattered -61% [9] in the wartime period 1912 to 1920.
And a balanced UK portfolio was shredded by -58% between 1973 and 1974, taking nine years to recover.
Is nowhere safe?
While locking the doors or calling the sheriff rarely seems to hold the darkness at bay, time usually provides the silver bullet.
The annualised return averaged over the last 116 and 50 years has been:
| Selected countries | Last 116 years | Last 50 years |
| UK | 5.4% | 6.4% |
| US | 6.4% | 5.3% |
| Sweden | 5.9% | 8.7% |
| South Africa | 7.3% | 7.9% |
Source: Credit Suisse Global Investment Returns Yearbook 2016, 1900-2015
But here comes the baddie back from the dead one last time:
- Austrian equities averaged a hideous 0.7% gain over the last 116 years.
The only stake in the chest against that kind of dire performance to diversify your portfolio globally [15].
Global equities have earned a 5% average annualised return over the last 116 and 50 year periods.
And while they’ve only earned a 1.6% average over the last 16 years, a 50/50 global portfolio would still have returned 3.8% on average, over the same timeframe.6 [16]
It’s behind you!
The difference between a scary movie and the investor gore I’ve cited above is that those investment returns returns are real. (And after inflation, too, not nominal).
But understanding the monsters that can stalk your portfolio is your best defence against doing the wrong thing in such terrifying situations.
None of these work:
- Running away through the woods at night.
- Calling a priest.
- Emotional sex in a flimsy tent after your best friend was eviscerated.
- Selling up when the market bottoms out.
Take it steady,
The Accumulator
p.s. The recovery times can be a bit misleading. Reality can be kinder. If you keep buying assets as they fall in price and rebound then you will personally recover more quickly (because you bought more assets at cheaper prices) than the market overall. However if you are forced to sell assets during the downturn then your portfolio will take longer to recover its previous value (as you have fewer assets that must now rise further to reach the previous peak). Bear markets [17] (a loss of 20% or more) across global markets (Jan 1980-2016) took an average of 798 days to recover (or just over two years and two months) according to Vanguard [18].
- Barclays Equity Gilt Study 2015 [↩ [23]]
- Smarter Investing [24]
, 3rd edition, Tim Hale [↩ [25]]
- Smarter Investing, 1st edition, Tim Hale, page 291. I know it’s the Bank of England that sits on Threadneedle Street but the London Stock Exchange is on Paternoster Square and that’s not going to work. [↩ [26]]
- Barclays Equity Gilt Study 2015. The use of calendar years probably masks some big falls where the market recovered before year end but these stats are the best I have. [↩ [27]]
- Smarter Investing, 1st edition, Tim Hale, page 286 [↩ [28]]
- Not taking into account costs or taxes. Credit Suisse Global Investment Returns Yearbook 2016, 1900-2015. [↩ [29]]