The impact of staying invested
during market turmoil
The financial downturn of 2008 and 2009 undoubtedly challenged your convictions, investment beliefs and perhaps your financial plan itself. Staying the course during the downturn was difficult for many investors.
Some investors chose to move to cash investments hoping to avoid future losses. Some tried to time the markets. But market timing requires two
decisions—not just one. The first is when to sell, and often more importantly, when to get back in.
Knowing when to get back into the market can be a much more difficult decision than pulling out. Hindsight is always 20/20, and just because someone wants to time the market doesn't mean that they can. So, how did staying the course compare with going to cash?
In the exhibit of a hypothetical 60/40 portfolio on Sept. 30, 2008 (two weeks after the collapse of Lehman Brothers and a defining moment in the recent financial crisis), we compare results. The starting point for the $100,000 hypothetical portfolio is Oct. 9, 2007, the prior market peak.
Click for a larger view
The choices as of September 30th are:
Stay invested, making no changes to the 60/40 index strategy all the way to the present. As of Dec. 31, 2010, this index portfolio is valued at $104,502.
React to the downturn and pull out of 60/40
portfolio, going to 100% cash, represented by the Barclays Capital 1-3 Month U.S. Treasury Bill index, on Sept. 30, 2008, and remain in cash to Dec. 31, 2010. This portfolio is valued at $85,469.
React to the downturn and pull out of 60/40
portfolio, going to 100% treasuries, represented by the Barclays Capital Treasury Index, on Sept. 30, 2008, and remain in treasuries to Dec. 31, 2010. This portfolio is valued at $94,451.
As the chart shows, when sticking with a 60/40 index strategy,the portfolio recovered a greater percentage of its lost value—and at a faster rate—than when it went to 100% cash or
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60/40: 40% Russell 3000 (U.S. equity), 20% Russell Global xU.S. Equity Index (non-U.S. equity), 40% BC Aggregate Index (U.S. bonds); Cash: BC 1-3 Month T-bill (cash)
This hypothetical example is for illustration only and is not intended to refl ect the return of any actual investment. The 60/40
Balanced Index portfolio does not refl ect a deduction for expenses or fees, had it done so, returns would have been lower.
Index returns represent past performance and are not a guarantee of future performance.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
No investment strategy can guarantee a profi t or protect against a loss.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
The information, analysis, and opinions expressed herein are for general information only. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
Barclays Capital U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities.
Barclays Capital 1-3 Month U.S. Treasury Bill index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than or equal to 1 month
and less than 3 months.
Russell Global ex-U.S. Index measures the performance of the world's largest investable securities, based on market capitalization, excluding securities in the Russell 3000.
Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Data is historical and is not indicative of future results.
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First used March 2010.
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