Investing during crisis

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  • Investing during crisis

    Market response to crisis

    The following are excerpts from our latest Research Report, Investing During Crisis – The Paradox of Risk. To read the report in its entirety, click here.

    Crises and their subsequent repercussions (the human emotional response included) are known aspects of life. While crisis events often impact the market negatively, history has demonstrated repeatedly that the market does readjust, recovering and often improving within 12 months of the disruptive event.

    The impact of recent crisis events in U.S. history on broad stock market performance over time has been both positive and incremental, as evidenced in the graph above. Within a one-to-five year period, the market interruption has faded into the past as the market continues its progression upward and forward. This growth pattern has played out repeatedly over time. …

    Average Investor Response

    Investors who yield to emotional influence and exit the market following a disruptive event do so at the worst possible time. They suffer the full effect of the decline by selling and locking in a real loss (versus a paper valuation reduction). They also limit themselves from subsequent recovery opportunities.

    As markets are examined, it is imperative to recognize that extreme bear markets and raging bull markets represent the two sides of risk. Either can prompt the average investor to take rash action when the more pragmatic (and profitable) response is to remain resolutely committed to a thoughtfully engineered and customized investment strategy. …

    Fortitude is a valuable and imperative asset for the long-term investor, especially during a crisis or period of uncertainty.

    Balanced Strategy: 7.5% each – S&P 500 Index, CRSP 6-10 Index, US Small Value Index, US Large Value Index; 15% each – International Value Index, International Small Index; 40% BofA Merrill Lynch One-year US Treasury Note Index. S&P data provided by Standard & Poor’s Index Services Group. Merrill Lynch Indices used with permission; copyright 2010 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. US Small Value Index and US Large Value Index provided by Fama/French. International Value Index provided by Fama/French for July 1981–December 2010 and MSCI World ex USA Value for January 2011–September 2011. International Small Cap Index compiled by Dimensional Fund Advisors from Style Research securities data; includes securities from MSCI EAFE countries in the bottom 10% of market capitalization, excluding the bottom 1%; market-cap weighted; each country capped at 50%; rebalanced semi-annually. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance.

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