How do the last two years compare to the worst sequences of return in history?
Posted on March 22, 2024

I’ve been encouraged about returns to date for this year and the outlook for our economy, but 2022 was a really bad year. Stocks and bonds combined for the roughly the fifth worst portfolio return in history. We rebounded in 2023 and are doing well in 2024 so far. I’m encouraged that we may not be riding a sequence of return similar to the most harmful in history.


This post gives a snapshot of where we stood at the one-year and two-year marks compared to the two most harmful return sequences in history. At the two-year mark, our 2022+2023 portfolio was better off compared to those two periods. And we’re clearly in positive territory so far in 2024.


== 2022: really bad ==


The combination of the sixth-worst stock returns and the worst bond returns in history combined for a portfolio return that was not better than the fifth-worst portfolio return in history. (For someone with a portfolio mix of 60% stocks and 40% bonds – which I hate – 2022 was the worst portfolio return in history.)


2022 was VERY unusual. It’s rare that bonds don’t outperform stocks when they decline. Bonds have outperformed 27 of the 30 times stocks have declined. And 2022 was the only time that bonds were worse than stocks when stocks declined by more than 10% real return.


Stocks have declined in 30 of the last 98 years, and bonds have been better in 27 of those years. 2022 was the only year when bonds had worse return than stocks when stocks cratered.


== Most harmful sequences ==


We’ve had three horrible start-points for a retirement portfolio in the last 98 years: withdrawals combined with horrible returns means a portfolio depletes. The three most harmful sequences for a portfolio started in 1929, 1969 and 2000.


Three most harmful periods for a retirement portfolio: sequences that started in 1929, 1969 and 2000. 1969 was the worst: steep deline for stocks and longest period of 0% cumulative return for both stocks and bonds.


The sequence that started in 1969 was the most harmful for retirees withdrawing each year from their portfolio for their spending. A poor four-year start was followed by the second worst two-year return in history. It’s the worst six-year return period by a long shot. The 1969 sequence is the one with the potential to deplete a portfolio to the point that it no long supports a full withdrawal for spending. It’s the return sequence intersects zero the quickest in the displays at FIRECalc.


I built a spreadsheet that shows the detail for one example: a portfolio lasts 20 years if it rode the 1969 sequence. Assuming that sequence is the worst we could expect in the future, 4.5% is a safe withdrawal rate for essentially zero chance of depletion in 20 years.


The second-most harmful sequence started in 2000. You can see a .pdf of a spreadsheet with the same inputs.


== Compare ==


I compare 2022 with the start of those two: 1969 and 2000. The portfolio return rate at 85% Stock and 15% bonds (my portfolio mix) was TWICE AS BAD of a start. That conclusion holds for all reasonable mixes of stocks vs. bonds. Has to: bonds were worse than stocks.



2023 was a strong rebound, and at the end of two years, the 2022+2023 result was better than the two by 4% to 10%. That’s not staggeringly better, but it is better.



We are not out of the woods, but the point at the end of 2023 and the trend so far in 2024 encourages me to think that the 2022 sequence won’t turn out to be one of the most harmful in history.



Conclusion: 2002 stock and bond returns resulted in about the fifth worst portfolio return in the last 98 years. Stock returns were the sixth worst and bond returns were the worst.


The return rate for a portfolio was more than TWICE AS BAD as the first year of the two most harmful return sequences for a retirement portfolio in history. Alarm bells went off, or should have gone off.


2023 was a strong rebound and was far better than the second-year return for the most harmful sequences of return in history. Our 2022+2023 portfolio value is GREATER than if we would have been riding the two most harmful sequences in history. Not by a whole lot, though. And we’ve continued to improve so far in 2024. I’m encouraged and think that that the horrible 2022 may not be the start of return sequence similar to the most harmful in history.

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