Is directional risk real?

In the 2017 edition of the Credit Suisse Global Investment Returns Yearbook, published this month, is this terrific illustration of the power and danger of equity investment:

US equity investors have enjoyed 6.4% average returns over the period 1900 to 2016. That has come with a fairly hefty standard deviation of 20%. But compared to other global markets that’s not bad.

On the other hand, the US standard deviation includes a worst year return of -38.4%. But, again, not bad compared to, say, Germany or Japan right after the Second World War.

However, when the years 1929 and 1930 are included the US decline was 80% in real terms, peak to trough. For the UK the worst such range was 1973-1974 when markets fell 71%. More recently, 2008 has been the worst year on record for almost half the markets listed.

Bottom line – it’s not easy to forecast when they will happen but catastrophic declines will punctuate our equity existence. So hedge.