Content courtesy of Dimensional Fund Advisors. Author is Wes Crill, PhD, Senior Client Solutions Director and Vice President.
Everyone knows it’s ill-advised to go grocery shopping when you’re hungry. Your appetite in the moment is different than in normal circumstances, so you’re likely to buy foods you’ll never actually eat. I break this rule all the time, which is how I end up with four boxes of frozen mozzarella sticks.
Similar caution should apply when it comes to asset allocations in the wake of market downturns. When stocks decline, investors may be tempted to move into cash in order to avoid any further losses. That’s only natural, as the appetite for risk likely changes following the first drop. However, history tells us that’s probably the wrong move. A balanced asset allocation of 60% stocks and 40% bonds has on average outpaced cash in periods following three-month market declines. An investor sitting on the sideline might eventually turn nauseous at the missed opportunity from a market rebound.
Past performance is not a guarantee of future results.
In USD. US equity performance measured by the Russell 3000 Index. There are 29 three-month periods where equities declined 10% or more. Of those, 60/40 Portfolio outperformed cash in the following 1-, 3-, 6- and 12-months in 20, 22, 21 & 25 periods, respectively. The 60/40 allocation is 60% Russell 3000 Index and 40% Bloomberg U.S. Aggregate Bond Index and is rebalanced monthly. Cash is represented by the three-month U.S. Treasury Bill. Equity losses of more than 10% over three months trigger the move from a 60/40 portfolio to all cash. All performance results of the hypothetical models are based on performance of indices with model/backtested asset allocations; the performance was achieved with the benefit of hindsight; it does not represent actual investment strategies. The model's performance does not reflect advisory fees or other expenses associated with the management of an actual portfolio. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the advisor's decision making if the advisor were actually managing client money. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. “Three-month US Treasury Bill” Source: US Treasury via Ibbotson/Morningstar. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Bloomberg index data provided by Bloomberg.
Disclosures
All expressions of opinion are subject to change. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions. Diversification neither assures a profit nor guarantees against loss in a declining market.
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