Aug 27 2012
Few current investors have suffered through a serious recession or depression. Because one has not occurred in their investing experience, many consider such an event improbable if not impossible. Others do not understand how brutal such an event can become.
Major corrections used to be normal events. Will Bancroft provides a perspective as to their frequency:
This contemporary investor behaviour is contextualised with reference to the work of the economist Professor Robert Barro. Mr Barro’s work finds that although there have been 58 ‘disasters’, a drop in GDP of >10%, in the 20th century, only two occurred post 1950. During this time portfolios positioned for the good times, heavily allocated towards yield and productive investments, have reaped a fine harvest.
Recent experience has conditioned investors to expect up markets and economies. Only two “disasters” occurred in the last fifty years of the twentieth century. But what about the 56 that occurred in the prior half century? What changed to make the incidence of disasters drop from approximately one per year to one every 25 years?