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Recovering losses from a market downturn
The impact of investing sooner rather than later

As we emerge from a difficult economic environment of 2008 and early 2009, many investors are finding their diversified portfolios down by one-third or more. Watching a portfolio decline so quickly and dramatically is challenging to say the least, and many investors may wonder how long it will take to return to pre-downturn levels.

History makes the message clear
Investors who sit on the sidelines after a downturn missed the higher-than-average returns that followed market corrections. While it may be tempting to stay in cash until you're sure the markets have calmed, history shows us that you may have a better chance of recouping your losses—and doing so at a faster rate—if you re-enter the markets sooner rather than later.

Looking at historical index returns, we can study how the market behaved coming out of prior market downturns. Between 1926 and 2008 there were seven periods of recession where markets were down more than 25% and the down period lasted longer than 12 months. On average the annualized market returns were notably higher in the 10 years after each market rebound compared to long-term results from 1926-2008.

When post-recession returns are higher than the long-term average, the amount of time to recover from a significant downturn is dramatically reduced.

Years to recover from a one-third loss

Exhibit 1: Based upon 1926-2008 average annualized market returns

This chart shows that using long-term market averages, it took an investor with a portfolio that was invested 60% in stocks and 40% in bonds approximately 5.2* years to recover from a one-third loss, and it took an all-stocks investor approximately 4.6 years.

Source: Stocks: Ibbotson to 1979, Russell 3000® Index 1979-2008. Bonds: Ibbotson to 1979. Barclays Capital U.S. Aggregate Bond Index 1979-2008. Cash: Ibbotson to 1979. CitiGroup T-Bill Treasury Index 1979-2008. 60/40: 60% MSCI All Country World, 40% Barclays Capital U.S. Aggregate Bond Index.

Exhibit 2: Based upon average annualized 10-year market returns post -recession

If you look at the returns experienced in the 10 years after the downturns in the next chart, an investor with a 60/40 portfolio took just 3.8 years to recover the one-third loss. This is a reduction in recovery time of almost 1.5 years from Exhibit 1. Investing in all equities, while increasing the exposure to risk, reduced the investor's recovery time by 1.7 years—a 37% quicker recovery.

Source: Stocks: Ibbotson to 1979, Russell 3000® Index 1979-2008. Bonds: Ibbotson to 1979. Barclays Capital U.S. Aggregate Bond Index 1979-2008. Cash: Ibbotson to 1979. CitiGroup T-Bill Treasury Index 1979-2008. 60/40: 60% MSCI All Country World, 40% Barclays Capital U.S. Aggregate Bond Index.

For an all-cash investor, there is little difference between the long-term average recovery time and the post-correction recovery time. Both scenarios result in bounce-back timeframes in excess of 10 years.

Keep in mind that markets, in general, rarely return "average" gains but give us a series of returns that are higher and lower than the long-term average. And while indexes are unmanaged and cannot be invested in directly, they are a good proxy for the market.

Re-entering the market
As the economy shows signs of recovery, consider the cost of waiting to re-enter the equity markets. It takes some courage, but with the help of your financial advisor and a focus on your long-term goals, you can find the right strategy to get off the sidelines and back into the game.

Request a referral to a financial advisor who can help.

* Please note that example timeframes do not take into account the impact of additional contributions, which could shorten the recovery time in any scenario. Taxes and expenses have not been included in the analysis. Had they been included returns would have been lower and recovery time would have been longer.

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.

Bond investors should carefully consider risks such as interest rate, credit, default and duration risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield ("junk") bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to sub-prime mortgages. Generally, when interest rates rise, prices of fixed income securities fall. Interest rates in the United States are at, or near, historic lows, which may increase a Fund's exposure to risks associated with rising rates. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries.

Investment in global, non-U.S. or emerging markets fund's return and net asset value may be significantly affected by political or economic conditions and regulatory requirements in a particular country. Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation. Such securities may be less liquid and more volatile. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and political systems with less stability than in more developed countries.

Historical stock data from 1926-1979 is from Ibbotson Associates, Inc., which publishes annual yearbooks featuring comprehensive, historical views of the performance of capital markets in the United States dating back to 1926.

Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

CitiGroup T-Bill Treasury Index: An unmanaged index composed of all U.S. Treasury notes and bonds with remaining maturities of at least one year and outstanding principal of at least $25 million that are included in the Citigroup Bond US Treasury Index. Securities in the US Treasury Index are weighted by market value, that is, the price per bond or note multiplied by the number of bonds or notes outstanding.

MSCI All Country World Index: A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2009 the MSCI ACWI consisted of 45 country indices comprising 23 developed and 22 emerging market country indices.

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.

*On 11/3/08, Barclays Capital announced the rebranding of its unified family of indices under the "Barclays Capital Indices" name. The rebranding changes the name of the index from "Lehman Brothers" to "Barclays Capital".

Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group.

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.

Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.

The Russell logo is a trademark and service mark of Russell Investments.

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Copyright © Russell Investments 2012. All rights reserved.

RFS 09-2538. First used: October 2009.


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