The Depression bear market

Author Taylor Larimore recalls his personal experience of the 1930’s great depression in this guest post.

Personal and financial history can be helpful to understand how stock and bond markets work.

stockcrashheadline

1929 stock market crash

I was eight years old in May 1932, when the Dow declined 89%. My Grandfather, Christopher Coombs, was a principal in the United Founders Corporation which was the largest investment trust (now called mutual fund company) in the United States. My father’s restaurant business (Larimore’s Diner in Foxboro, MA) folded and we moved into Grandfather’s Miami home (1 of 3).

My grandfather was nearly 100% invested in stocks purchased on margin. He lost nearly everything.

BEAR MARKET OF 1929-1937 (Dow plunged 89%)

Year 1929 1930 1931 1932
Large cap stocks -31.00% -25.00% -43.00% -8.00%
Mid/Small cap stocks -34.00% -35.00% -47.00% -6.00%
Micro cap stocks -47.00% -38.00% -50.00% -5.00%
5 yr Treasury bonds 4.00% 7.00% -0.20% 9.00%
hooverville

Hooverville  in the Depression

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell before losing everything. Nearly all financial ‘experts’, including newspapers, magazines, and radio commentators recommend “sell”. You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicide’s increase.

Most stock investors in the 30’s sold and never returned to the stock market. Many ended their days with their family in poverty. I remember the “poor farms” on the edge of towns. There were no social security retirement benefits. Beggars were everywhere.

What about a balanced portfolio

It was a different story for the investors who were diversified and DID NOT SELL. A wealthy investor, holding $1,000,000 in an actual balanced fund  (the Wellington Fund) in 1929 would have realized the following capital values, assuming the investor bought and held the fund during the Depression era.

Year Annual return Nominal $
1929 -4.21% $957,900
1930 -21.21% $754,729
1931 -26.43% $555,254
1932 -1.82% $545,149
1933 6.83% $582,382
1934 20.33% $700,781
1935 35.33% $948,367
1936 31.31% $1,245,300
1937 -35.41% $804,339
1938 19.11% $958,049
1939 10.31% $1,056,824
1940 0.16% $1,058,514
1941 -3.91% $1,017,127
1942 16.62% $1,186,173

I doubt if any bear market will equal the severity of that one when I was a boy. However, if we understand how markets work the lesson is clear:

  1. Selling near the bottom of a bear market is a sure way to lose money.
  2.  It requires courage, but NOT selling in a bear market has always rewarded investors with a profit.
About

Barry Barnitz, administrator of both the Bogleheads® wiki and of Financial Page, a Bogleheads® blog

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