On close inspection, however, German markets during this period, although similar in many respects to those in Japan, were also different in at least one important way.
Yes, the maximum drawdown of -68% for a portfolio invested 100% in the DAX 30 was a debacle nearly identical to Japan's -66%. And, yes, the peak drawdown for government bonds was much easier to endure, hitting about -10% in both countries. And in both cases, a rebalanced portfolio split the difference. The biggest drawdown was about -31% for an investor who went half in stocks and half in government bonds, in the local currency, while rebalancing to 50-50 whenever the end-of-month allocation to stocks drifted past 45% or 55%.
The worst-performing months were also virtually identical in the two countries. Both had worst-month drawdowns around -25% for their all-stocks portfolios, -4% for government bonds, and -10% for 50-50 rebalanced portfolios.
What's interesting, however, is how the two countries differed on real returns, the cumulative annualized gains after adjusting for local inflation. In Japan, the rebalanced portfolio matched the performance of government bonds, which fared better than stocks. In Germany, stocks and bonds switched postions. The DAX 30 provided the better eventual outcome. And rebalancing? It went with the winner, matching German stocks this time.
Had you been a newbie investor in Germany or Japan in 1994, could you have known with any certainty whether to bet on stocks or on bonds for the next quarter century? Of course not. But if you hedged your bet by rebalancing equally across the two classes of investments, your end-result would have been as good as placing the lucky bet.
That's a powerful argument in favor of rebalancing as a strategy. But wait! Is the benefit limited to recent examples like these two, where mature markets in developed countries were all beset by asset bubbles, the Great Recession, and the financial engineering of central banks? To expand the analysis, the next post will examine yet another example, the U.S. S&P 500 from 1944 to 1969, when the economic and financial setting was decidedly different.