Time in the market is important to growing wealth over generations. Protecting that wealth involves avoiding irreparable wealth destruction. True wealth destruction events are not necessarily global stock market crashes, like the Global Financial Crisis. True wealth destruction follows events that can permanently impair wealth. Such events can be personal: overspending, a divorce, or financing investments through excessive debt. Historically, the impersonal events that cause unrecoverable loss have fallen into four categories: inflation, war, sovereign default, and revolutions. In each case, investor losses could have been significantly reduced by following a globally diversified investment approach.
Hyperinflations have generally been local phenomena, not global ones. They are typically caused by direct central bank financing of a government’s debt. They often lead to both significant local asset price inflation and real wealth destruction on a currency-adjusted basis.
Wars have consistently destroyed wealth too. Between 1942 and 1945, the German stock market fell 98%. Japanese equities lost 95% in USD terms. And cash and bonds fared little better. In 1948 the Deutschemark replaced the old Reichsmark at a rate of one new to 10 old, decimating private savings. In more modern conflicts, the Iraqi dinar fell 99.98% between 1990 and 2003.
Sovereign defaults can equally lead to near-permanent wealth destruction. Even if Greek equities return 7% a year in the future, they would only regain pre-crisis nominal levels by 2047. Greek government bonds lost 76% of par value in the 2012 restructuring. Investors would need to wait until the mid-2050s to return to par at a coupon of 3%, even after the recovery to date.