For most investors, the Great Crash of 2008 did severe damage to investment portfolios. Unless investors were heavily allocated to Treasury bonds and gold, the majority of asset classes fell sharply in 2008 triggered by the Lehman Brothers bankruptcy in mid-September. In 2008, stocks suffered their worst calendar year decline since 1938, dropping almost 40%.

Unfortunately, the road to capital recovery will be long and, for the most part, unattainable for retirees who lost a big chunk of their money in last year’s crash. Making that money back for those investors that were over-weighted in common stocks will take a big bull market or at least a massive bear market rally to recover those awful losses.



The above chart depicts the sobering mathematics on capital losses starting with a 10% loss and the incipient recovery rate that follows all the way down to the depressing state of affairs after suffering a 90% loss on your portfolio. The latter affected most investors after the 1929 October crash and the corresponding bear market that ensued for the next 36 months until stocks bottomed in mid-1932. By that time, the Dow Jones Industrials Average had collapsed a cumulative 89% -- the worst bear market in history.

If you bought stocks at the market peak in 1929 then you had to wait until 1956 to break-even or a cumulative 900% total return.

From their highs in October 2007, the Dow and the S&P 500 Index now sit about 50% below their best levels and will require a 100% cumulative return for those investors looking to make their money back. The odds of this happening, however remote, are possible.

Even amid a crippling economic depression in the early 1930s the Dow managed to gain almost 375% from mid-1932 until early 1937 before crashing again. But the Dow did hit a secular low of 41.22 in the summer of 1932. Similarly, after tanking almost 60% from its all-time high in October 2007, the Dow hit another low in this bear market on March 9. Whether this was THE low in this bear market has yet to be determined. Stocks have rallied about 27% off their Match lows.

Still, the odds of a quick recovery in the stock market are not good. That’s why investors like Warren Buffett hate losing money because the consequences of reverse compounding or capital loss is formidable and, in some cases, can require a decade or two to recover principal. Yet even the Sage of Omaha has seen his venerable Berkshire Hathaway Class A stock plunge a cumulative 43% since hitting all-time highs in late 2007.

If there’s one important lesson to learn from a crash in capital markets it’s the virtues of asset allocation. This means investing your assets across a broad spectrum of asset classes that should maintain a low-to-negative correlation to each other. And though most asset classes did correlate positively in 2008’s global carnage – an exceptionally disastrous year – Treasury bonds, the dollar, gold, managed futures (CTAs), reverse-index funds and some macro hedge funds posted impressive returns offsetting losses in stocks and most credit markets. Even some esoteric and far-out asset classes like fine red wine and high-grade stamps posted gains in 2008.

The best long-term investment strategy is to avoid stock market index-hugging. Instead, consider a diversified portfolio of asset classes that can be constructed through a combination of low-cost ETFs and actively-managed investment products, including some alternative investments. There’s always safety in numbers. Always.

Have a good weekend. I’ll be back on Monday from Bermuda.