After the Swan Dive

Bill Kosar

I’VE BEEN RETIRED for six years and—like many retirees—I rely on my portfolio’s appreciation, interest and dividends for most of my retirement income. The high inflation of 2022, coupled with poor stock and bond market returns, have me pondering what history would predict for 2023’s performance.

I decided to look at how frequently both the stock and bond markets have performed poorly in the same year, and what subsequent returns have typically been. Simultaneous declines in both the U.S. stock and bond markets might be considered a “black swan” event—something far outside what’s normally expected. The term was made popular by the bestselling book by Nassim Nicholas Taleb.

And, yes, 2022 qualifies as a black swan: Simultaneous annual stock and bond declines have occurred just five times over the past 95 years, as you’ll see in the chart below, and 2022 was the first year when both stocks and bonds posted double-digit drops. The chart shows the total annual returns for the S&P 500 and 10-year Treasury notes for 1928-2022, which I got from the site maintained by New York University finance professor Aswath Damodaran.

What does Damodaran’s historical data tell us? My conclusion: Markets tend to have healthy recoveries in the three years after bad years. Indeed, for a 50% stock-50% bond portfolio, all four of the prior black swan years were followed by at least three up years, with the cumulative three-year gain ranging from 27.5% to 57.8%. While black swan years have been relatively rare, the data suggest that maybe investors in those years were overreacting to fears of future economic problems that didn’t come to pass.

The lessons: It’s important to maintain a large enough cash reserve to cover at least three years of your foreseeable retirement spending, so you’re never forced to sell long-term investments at low prices to cover your short-term spending needs—and it’s equally important not to overreact to a single bad year.

Bill Kosar retired after working for 40 years in various roles as an engineering and business manager in the semiconductor industry, where he spent much of his time doing exploratory and diagnostic analysis of technical and financial data. He has 45 years of experience with various types of investments, including stocks, bonds, options, limited partnerships and mutual funds, and is familiar with both the fundamentals and the pros and cons of these types of investments. Bill enjoys looking at economics from a macro perspective. He’s also an avid bird photographer and gardener, and mediocre golfer. 

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