Q: If one is invested 100% into global equities, what would you consider as a realistic worst-case one-year return? I’m leaning towards a loss of up to 70% but not sure what history would show.
A: I think your 70% number is probably realistic. As you will see in this table, the worst calendar year (1931) for U.S. large cap value was a loss of 62%. I’m sure there are 12-month periods that were worse. Of course, when we are living off our money in retirement, we should also be concerned about multiple year losses. For example, the S&P 500 had a 22.7% compounded annualized loss from 1929-1932. At that rate of loss, $100,000 would be worth $35,704 at the end of 4 years. For the same period the small cap value asset class had a 37.7% compounded annualized loss with a final value of $15,064 for the initial $100,000 value. I think most people believe we now have tools to protect against the devastating impact of a great depression, but we do have proof it can happen. In some bear markets a broadly diversified, globally diversified portfolio protects investors against huge losses, like 2000-2002, but most big bear markets are more like 2007-2009 when almost all equity asset classes fell.