Meb Faber on how different asset classes perform in a crashing stock market

As you can see from some of my recent posts, I’ve been searching for information on how different asset classes handle financial crises.

I came across a nice white paper from Meb Faber and his crew at Cambria, which has exactly what I was looking for. They have evaluated performance of stocks, bonds, commodities, gold and REITs during the S&P 500’s 10 worst months¬† since July 1986.

Zoom in to check it out:

Source: Meb Faber Blog

A few things to note from this:

  1. Government bonds have offered reasonably good protection when the S&P 500 has crashed
  2. Foreign stocks and REITs have generally offered little to no protection
  3. Gold generally has offered some protection, but on one occasion the draw down was the same as the S&P 500

Meb evaluated performance over longer time frames as well. As they so, no two bear markets are the same.

Source: Meb Faber Blog

The above table shows that commodities and REITs may or may not act as a hedge against stock declines.

In summary, cash and government bonds (not more exotic bonds) seem to be the best bets if you want to reduce your draw down in a bear market.  Alternatively, you can try sophisticated solutions like puts and tail funds, which Meb outlines towards the end of the article.

Read the full paper here.

I’d also recommend subscribing to his podcasts. I’ve learnt a lot from Meb and his guests over the past few weeks while walking around the park near my home.

PS: please help me out in the comments if you know any wordpress plug-ins which allow you to insert higher quality pictures.

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