Shedding light on downturns and recoveries.
Oct/15/08 09:24 AM Filed in: Diversify
Risk
I wanted to reach out given today's extraordinary
events. Let me reassure you that although we saw
almost all asset classes fall today, we feel this
panic will not last for long.
There have been many U.S. equity market downturns over time with varying levels of severity. The most severe downturn marked the start of the Great Depression, where stocks lost over 80% of their value. However, a diversified portfolio of 60% US stocks and 40% US bonds would have declined much less (about 50%).
In the 70's we witnessed another violent market environment. Again, diversification provided important downside protection that you can see in the graph below.
Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of January 1973 and July 2000, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Thankfully we now have easy access to invest in global markets and this provides additional diversification benefits. When stocks lost 44.7% of their value during the 2000 bear market, even a basic globally diversified portfolio of 10% Real Estate, 50% Global Equities and 40% Global Fixed income would have only lost about 15%.
As an investor, remember this: in moments of panic asset classes can become correlated and the benefits of diversification tend to be minimized. The two key words in this environment are moment and panic, because we are in a moment of panic. Panic does not last forever. As the panic subsides, the benefits of diversification will reappear. In the past, diversified investors who have stayed invested have been the first to benefit. Inevitably, the least expected asset class leads the charge out of the bottom and rewards those who chose to broadly allocate.
Let me leave you with a bit of hope. CLICK HERE TO DOWNLOAD a series of charts that shows US market declines and recoveries. You can also CLICK HERE TO DOWNLOAD a chart that shows how the US markets have behaved after previous financial crises. While the financial system is facing challenges never seen before, we feel strongly that the outcome will be the same as it has been in the past. A market recovery is inevitable and it will come sooner then we all think.
There have been many U.S. equity market downturns over time with varying levels of severity. The most severe downturn marked the start of the Great Depression, where stocks lost over 80% of their value. However, a diversified portfolio of 60% US stocks and 40% US bonds would have declined much less (about 50%).
In the 70's we witnessed another violent market environment. Again, diversification provided important downside protection that you can see in the graph below.
Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of January 1973 and July 2000, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Thankfully we now have easy access to invest in global markets and this provides additional diversification benefits. When stocks lost 44.7% of their value during the 2000 bear market, even a basic globally diversified portfolio of 10% Real Estate, 50% Global Equities and 40% Global Fixed income would have only lost about 15%.
As an investor, remember this: in moments of panic asset classes can become correlated and the benefits of diversification tend to be minimized. The two key words in this environment are moment and panic, because we are in a moment of panic. Panic does not last forever. As the panic subsides, the benefits of diversification will reappear. In the past, diversified investors who have stayed invested have been the first to benefit. Inevitably, the least expected asset class leads the charge out of the bottom and rewards those who chose to broadly allocate.
Let me leave you with a bit of hope. CLICK HERE TO DOWNLOAD a series of charts that shows US market declines and recoveries. You can also CLICK HERE TO DOWNLOAD a chart that shows how the US markets have behaved after previous financial crises. While the financial system is facing challenges never seen before, we feel strongly that the outcome will be the same as it has been in the past. A market recovery is inevitable and it will come sooner then we all think.