The graph shows that equity drawdowns have been far more severe and prevalent than bond drawdowns. 1Įxhibit 1 is a drawdown or “underwater” graph, where each new stock or bond peak value is reset to 0% to focus the eye on drawdowns. We survey a history of market drawdowns, first reviewing nominal stock and intermediate-term government bond drawdowns, then real (inflation-adjusted) stock and bond drawdowns from 1926 to June 2022. It manifests through time as stock-market and bond-market drawdowns, which are more intuitive (and painful) representations of risk. Standard deviation is a good summary risk measure for statisticians, but it is not intuitive to many investors. In addition to lower risk, bond returns were uncorrelated to stock returns (0.05), providing a diversification benefit. The higher return of stocks came with higher risk – a standard deviation of 18.6% versus just 4.4% for bonds. These returns compare to an inflation rate of 2.9% over that history. government bonds from January 1926 to June 2022. equities and 4.9% for intermediate-term U.S. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.The annualized return was 9.6% for U.S. There is no guarantee an investment strategy will be successful. Investing risks include loss of principal and fluctuating value. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP. add back in available at data_library.html. Peak is the highest point prior to a drawdown, and trough is the lowest point after the peak. Peaks and troughs are patterns that are developed by the price action experienced by all securities. For the 20% threshold, there are 2,561 observations for 1-year look ahead, 2,560 observations for 3-year look ahead, and 2,560 observations for 5-year look ahead. For the 15% threshold, there are 3,175 observations for 1-year look ahead, 3,167 observations for 3-year look ahead, and 3,166 observations for 5-year look ahead. For the 10% threshold, there are 3,442 observations for 1-year look ahead, 3,396 observations for 3-year look ahead, and 3,345 observations for 5-year look ahead. The bar chart shows the average returns for the 1-, 3-, and 5-year periods following 10%, 15% and 20% downturns. Whether a period is considered a downturn is analyzed on a daily basis, and therefore the 1-, 3-, and 5-year look ahead periods are overlapping. Returns are calculated for the 1-, 3-, and 5-year look ahead periods beginning the day after each downturn. Periods in which cumulative return from peak is –10%, –15%, or –20% or lower and a recovery of 10%, 15%, or 20%, respectively, from trough has not yet occurred are considered downturns. US Equity Returns Following Sharp Downturns
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