What comes next? Clues from historical sell-offs and their recoveries

After a difficult 2022, 2023 has started very strongly. This begs the question, one we’ve been asked a number of times by our adviser partners: how long is it likely to be until client portfolios recover their 2022 losses? And more generally, after any crisis, how long does it take for portfolios to regain their previous highs?

Whilst the exact path of future markets is uncertain, history does provide some clues. Part of our asset allocation process is to look at how our current chosen allocation would have performed in previous sell-offs. This provides information on:

  • how our various risk profiles would have performed during different past market stress scenarios
  • how long each risk profile would have taken to recover from these sell-offs

These historical scenarios then provide at least some idea about how portfolios might perform in future, as well as some comfort to investors around remaining invested through difficult times.

The result of the stress testing of our current asset allocations looks as follows:



As you can see, our asset allocations for each risk profile performed historically as you’d hope they would: our lowest risk profile allocation (P1) tended to fall less in a crisis than our riskiest profile (P7). This gives us some comfort that they would likely do the same in future crises (helping to preserve expected risk separation).

Also, over time, the higher risk of P7’s asset allocation was historically rewarded with higher returns. Again, this suggests it is likely to do so in future.

Given a key assumption of the financial planning process is that portfolios sold as ‘low-risk’ will sell off less than those sold as ‘high-risk’, but that ‘high-risk’ portfolios will outperform over the long run, such stress tests are very important to ensure that our risk-controlled portfolios behave as advisers and their clients would expect. We call this concept ‘good risk/return separation’ or sometimes refer to it as portfolios ‘flying in formation’, and it’s very much a key tenet of our investment management process.

A side benefit of this analysis is that it also explores past recovery periods and so sheds some light on how long it might take for portfolios to recover this time round. Below is a table of the recovery time, in months, from the peak before the sell-off until the time the portfolio fully recovers.


Unsurprisingly, the length of recovery very much seems to be linked to the depth of the sell-off. Riskier portfolios have historically taken more time to recover than lower-risk portfolios because they sell off more. At the same time, each risk profile generally appears to have taken longer to recover after deeper falls than after shallower falls.

On average, the recovery period was between 9 and 22 months for our current asset allocations (it should be noted that this is materially better than that of the FTSE 100, a less diversified portfolio).

The good news for current clients is that we’re already 13 months from the last peak at the end of 2021. Assuming we’ve seen the worst of the current selloff (likely, although unfortunately not a certainty), then history suggests a full recovery should now be months, rather than years, away. Markets do tend to recover and increase with time, rewarding clients who remain invested.

If you would like any information on our investment management processes or approach, please contact us here.