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Visualized: How Bonds Help Reduce Bear Market Risk
Which tactics can investors use to reduce portfolio downside risk?
One time-tested method is allocating to bonds. Bonds have sheltered portfolio losses during bear markets thanks to the lower risk profile of bonds compared to stocks. Often, when stocks declined during market selloffs, safer assets like bonds tended to increase as the demand for stability grew.
This Markets in a Minute from New York Life Investments shows the performance of bonds and stocks during bear markets since World War II.
Bond Performance During Bear Markets
Bear markets are defined as a 20% or more decline in U.S. large cap stocks from peak to trough. Since World War II, bear markets have occurred less frequently than bull markets, with the U.S. stock market spending 29% in a bear market versus 71% in a bull market.
With this in mind, we show how a spectrum of portfolio asset allocations to stocks and bonds have performed over the last several bear markets.
- Stocks: represented by U.S. large cap stocks
- Bonds: represented by U.S. intermediate government bonds, which are issued with maturity dates between two and five years
Allocation (Stock / Bond) | Average Drawdown | Average Time Until Recovery* |
100% / 0% | -34% | 3.3 years |
90% / 10% | -31% | 3.2 years |
80% / 20% | -28% | 2.9 years |
70% / 30% | -24% | 2.8 years |
60% / 40% | -20% | 2.5 years |
50% / 50% | -16% | 2.1 years |
40% / 60% | -11% | 1.2 years |
30% / 70% | -7% | 0.8 years |
20% / 80% | -4% | 0.8 years |
10% / 90% | -2% | 0.5 years |
0% / 100% | -1% | 0.2 years |
*Length of time until new all-time high
For a 100% stock portfolio, the average drawdown was -34%, with 3.3 years until recovery—the time it took to reach a new all-time high.
Comparatively, a portfolio entirely made up of bonds fell -1% on average during bear markets with a recovery time of just a few months.
Balanced Portfolios in Bear Markets
Looking closer, we show how adding bonds to a portfolio has cushioned portfolio losses over the following market downturns, sometimes by as much as 20 percentage points.
Bear Market | 100% Stock Portfolio Max Drawdown | 60/40 Portfolio Max Drawdown |
2020 | -20% | -10% |
2008 | -51% | -30% |
2001 | -45% | -22% |
1988 | -30% | -17% |
1973 | -43% | -26% |
1969 | -29% | -18% |
1962 | -22% | -13% |
1947 | -22% | -13% |
A balanced 60/40 portfolio had a 20% average drawdown, recovering in 2.5 years. During the 2020 COVID-19 crash, for instance, a 60/40 portfolio fell almost 10% and fully recovered in six months. By contrast, a 100% stock portfolio declined nearly 20%.
In all of the above historical downturns, investors with a diversified portfolio have been better positioned in a bear market.
Building Portfolio Strength
Bonds have historically seen less volatility than stocks during tougher financial conditions. Typically, riskier assets like stocks have been more prone to market fluctuations than bonds.
To prepare for a bear market, investors can structure a portfolio that aligns with their risk tolerance. Over the long run, the diversification benefits of bonds have been fundamental to protecting portfolios and lowering risk.
