Historical Declines in a Balanced Portfolio
I was recently meeting with a new client discussing the investment implementation part of their financial plan. They were financially secure but understandably anxious about market volatility. We had run the numbers and determined that a balanced portfolio, consisting of roughly 70% stocks and 30% bonds, was an appropriate mix for their retirement spending goals. But identifying the correct allocation also should include your risk tolerance, or how much risk you’re emotionally and mentally prepared to take on.
While we cannot predict the future, examining history can help us frame expectations around volatility, particularly declines. To get a clearer picture of how downturns may affect you, it helps to answer three key questions:
1. How often do significant declines occur?
2. How long do they tend to last?
3. How long does it typically take to recover?
I’ve written before about the ups and downs of the stock market, but the reality is that most investors don't hold all stocks or all bonds. They own a balanced portfolio, which doesn’t fully capture bull market highs, but also provides meaningful downside protection.
So, let’s look at some data on a balanced portfolio – 60% stocks and 40% bonds (Source: A Wealth of Common Sense).
Since 1945, a 60/40 portfolio has experienced 8 drawdowns greater than 10%, with an average decline of around 20%. Here’s how that plays out:
1. How often do significant downturns happen? About once every 10 years.
2. How long do they typically last? Around 12 to 24 months.
3. How long does a full recovery take? On average, about 2.5 years, but sometimes up to 3.5 years.
Put differently, you can expect a significant decline every decade or so, and it may take 3+ years to fully recover. That means roughly 30% of your investing life will involve living with a portfolio that’s well below its all-time high.
A diversified portfolio doesn’t just help soften the blow of market declines. It also gives you tools to benefit from downturns, by:
Rebalancing into asset classes that have fallen in value (buy low).
Withdrawing or spending from the more stable portions of your portfolio (typically bonds), so you’re not selling stocks while they’re down.
No portfolio is entirely immune to losses if you want to grow your wealth over time. But a balanced approach has proven resilient through many economic and market cycles.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.