AQR examines how diversification holds up during major equity drawdowns using nearly 100 years of data, focusing on whether shifting away from stocks actually protects portfolios. The paper challenges timing strategies and highlights a tradeoff where better downside protection often comes with lower long-term returns.
It Was the Worst of Times: Diversification During a Century of Drawdowns
AQR
Research
19 Pages
Key Takeaways
Frequent Equity Drawdowns: Equity markets experienced 11 drawdowns worse than -20% since 1926, averaging -33% losses and occurring roughly once per decade, reinforcing the persistence of large portfolio shocks.
Diversification Tradeoff Costs: Strategies with stronger downside protection delivered materially lower average returns, highlighting a measurable cost where improved hedging often reduces long-term performance by several percentage points.
Limited Timing Benefits: Attempts to tactically avoid drawdowns consistently underperformed, with long-term data showing diversified static allocations outperform reactive strategies across nearly 100 years of market cycles.
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