Risk over the Short and Long Horizon
Video
April 20, 2021
Monika Szikszai and Thomas Verbraken April 21, 2021 Short-horizon risk measures, like that aimed at mitigating one-year drawdown risk, do not take into account market recoveries that could happen during a long investment horizon. To investigate risk on longer horizons, we constructed historically based five-year scenarios from the 1970s until today and assessed their impact on a 60/40 portfolio of U.S. equities and bonds, accounting for quarterly reinvestment of income and rebalancing to the initial allocation. The portfolio experienced the largest initial one-year drawdowns in the scenarios starting in October 1973, April 2008 and October 2000, but even these scenarios generated a positive return (albeit well below the average 8% annualized return over a five-year period). How to interact with this plot: Select the start dates of the five-year scenarios at the bottom of the chart. Hold Shift to select multiple dates.
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The chart shows return paths (colored lines) along with the 5th and 95th percentiles of the distribution (shaded area). The asset allocation was a 60/40 allocation to equities/bonds, with the bond portfolio consisting of 50% U.S. Treasurys, 37.5% U.S. investment-grade corporate bonds and 12.5% high-yield corporate bonds. U.S. Treasurys and high-yield bonds are represented by Markit iBoxx indexes. The equity market is represented by the MSCI USA Index and U.S. investment-grade corporate bonds by the MSCI USD Investment Grade Corporate Bond Index. Based on market data as of Jan. 11, 2021.
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