After living through the longest bull market in history over the past 11 years, March was a sobering reminder that investing is risky. Rapidly evolving information regarding the coronavirus and its impact on how we live and work sent shockwaves through global stock markets. The Russell 3000, a broad market index representing the entire US stock market, had its 4th worst monthly return since its inception in 1979. Although steep equity declines like what we have experienced so far this year are worrying, they aren’t unprecedented, and we fully believe that sticking to your investment strategy in these tough times will put you in the best position to capture a recovery. In particular, we look to instill discipline to your strategy by maintaining its target allocation.
While equity market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By having specific rebalancing thresholds that dictate when to make trades in your portfolio to bring it back in line with it’s target asset allocation, RWM looks to bring discipline to the investment process and avoid letting emotional reactions dictate buying and selling decisions. Although the markets may move in any direction over the short term, buying into what is below target using proceeds from what is above target is a disciplined approach that maintains a portfolio’s long- term focus. We also look to utilize any cash flows into or out of a portfolio as an opportunity to rebalance. While markets continue to be volatile in the short-term, please let us know if you have any upcoming withdrawals or contributions we should be aware of.
Without a crystal ball, it’s impossible to know when the market will bottom out and begin to recover. What we do know is that equity returns have been positive following sharp downturns. US stocks have generally delivered strong returns, outperforming their historical average, over a 1, 3, and 5 year period following a 20% market decline like we experienced last month.
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Another important reminder of the benefit of remaining disciplined is the cost of trying to time the market as sitting on the sidelines waiting to get back into the stock market can be a costly strategy. The impact of missing even just a few days of strong returns can drastically impact overall performance. With the market being especially volatile over the past few weeks, the chances of missing out on a particularly strong day are even more heightened.
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Although it’s impossible to tune out the noise and focus solely on your long-term objectives, it’s important to stick to the plan that has rewarded investors historically and enabled them tothrough weathering market lows: remaining disciplined and rebalancing to take advantage of market movements.
Disclosures
Source: Morningstar, Inc.
Past performance is no guarantee of future results. Short term performance results should be considered in connection with longer term performance results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
Periods in which cumulative return from peak is –10%, –15%, or –20% or lower and a recovery of 10%, 15%, or 20%, respectively, from trough has not yet occurred are considered downturns. Returns are calculated for the 1-, 3-, and 5-year look ahead periods beginning the day after each downturn. Whether a period is considered a downturn is analyzed on a daily basis, and therefore the 1-, 3-, and 5-year look ahead periods are overlapping. The bar chart shows the average returns for the 1-, 3-, and 5-year periods following 10%, 15% and 20% downturns. For the 10% threshold, there are 3,442 observations for 1-year look ahead, 3,396 observations for 3-year look ahead, and 3,345 observations for 5-year look ahead. For the 15% threshold, there are 3,175 observations for 1-year look ahead, 3,167 observations for 3-year look ahead, and 3,166 observations for 5-year look ahead. For the 20% threshold, there are 2,561 observations for 1-year look ahead, 2,560 observations for 3-year look ahead, and 2,560 observations for 5-year look ahead. Peaks and troughs are patterns that are developed by the price action experienced by all securities. Peak is the highest point prior to a drawdown, and trough is the lowest point after the peak. Data provided by Fama/French. add back in available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ data_library.html. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the stocks in the S&P 500 at the end of the missed best day(s). Returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. Performance data for January 1970–August 2008 provided by CRSP; performance data for September 2008–March 17, 2020 provided by Bloomberg. S&P data provided by Standard & Poor’s Index Services Group. Investing risks include loss of principal and fluctuating value.