Perceived vs. Actual Impact Of A Recession
As you know, we've been experiencing a lot of volatility in the stock market lately which has left some of our investors feeling uneasy about their portfolios. In response to these concerns, I would like to invite you to review the observations below.
Perceived vs. Actual Impact of a Recession
• Short-term market swings are the norm, not a signal that “the sky is falling.”
• The 10 post-war recessions have lasted a median of 10 months (Source: Ned Davis Research; S& P 500 Index returns based 10 post-war recessions, “Recession Could Lead to Table Pounding Buy,” January 14, 2008).
• Many investors believed the economy would collapse after the 9/11 attacks but the Dow rebounded within a few months of the attacks.
• The Dow was also impacted by last year's sub-prime mortgage crisis but it bounced back and even reached a new milestone in May.
• Investors could miss the rebound if they have pulled out the stock market.
• We can take lessons from the past which indicate that the worst time to move money out of equity markets is after a recession has already taken grip.
• Investors should rely on the decisions they have already made regarding their investment strategy by relying on sound, diversified asset allocation decisions and staying with those sound decisions and approaches.
• Recessions help to flush out the excesses that exist during protracted bull market periods and eventually lead to higher than normal returns after the recession comes to an end (Source: Ned Davis Research; S& P 500 Index returns based 10 post-war recessions, “Recession Could Lead to Table Pounding Buy”, January 14, 2008).
• The stock market delivers over the long-term. From 1966 through 2005, the S&P 500 has returned an average of 10.53% however, the returns received each year varied greatly, from –26% to +37% (Source: Ibbotson Associates & SEI).
Our Position on Market Timing
• Market timing doesn't work. In our 40 years of experience, we have never seen consistent results produced by market timers.
• What produces consistent results is a patient and disciplined management process that consists of:
• Providing sound and strategic portfolio asset allocation decisions.
• Building sound diversification of managers within each asset class.
• Consistent monitoring of both current and potential managers.
Summary
A disciplined investment process moderates the risks inherent in investor behavior and provides a scientific approach designed to achieve goals and strategic objectives. Research has shown that the asset allocation decision, or how your investments are diversified among multiple asset classes such as stocks, bonds and cash, has by far the most significant impact on overall investment performance. Over 90% of the variation in returns is due to the asset allocation of investments in a portfolio (Source: Brinson, Singer and Beebower, 1991). This is why we believe that determining the right asset allocation for you is crucial to your investment success.
Article by: Tom Biesheuvel
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