By Tom Bradley

Michael Nairne and his partner (in all respects) Joanne Swystun started a firm called Tacita Capital in 2006. It is a family office for “exceptionally affluent families.”

Tacita publishes research pieces from time to time, the latest of which was recently published in the Financial Post (It’s a Recession, not a Depression).  With the ‘recession versus depression’ debate raging, the article is timely. It sheds some light on some of the lesser known facts about the 1930’s, in particular how portfolios performed. Michael points out that most analysis fails to take into account three things: dividends, after-inflation (real) returns and the recovery.

There is no disputing the massive declines that investors experienced, but for those that gutted it out, the depression’s full-cycle picture was better than it is usually portrayed.

The U.S. stock market didn’t start to recover until 1932, after the market had declined 80% from its peak. It got back to breakeven (in real terms) by 1936.

Balanced investors (20% government bonds, 15% corporates, and 65% stocks) fared better. Their portfolios declined in value by 32% and were back to breakeven by mid-1935. By the end of 1936, a balanced portfolio was up 35% from its peak level.

Interestingly, portfolios that were regularly re-balanced toward equities (when the stock weighting was 20% out of line) declined further than ones that didn’t, but generated a 79% return by 1936.

Michael makes no bones about the fact that it would have been tough to hold on through the depression, as it is today.

His article reinforces two things that we’ve been talking about repeatedly. First, that there are two sides to the cycle and to be successful, investors have to navigate both the up as well as the down.

And second, we’re not sitting at a market peak today. Even with the recent rally, most stock markets are still trading 35-40% below their 2007 peaks. At this juncture in the cycle, we should raise our return expectations for the next few years, not lower them.