The Aggressive Approach to a Bear Market

You’ve heard it from us before: “It’s about time in the markets, not market timing.” Is that still true, though, when you’ve retired and are beginning to draw down your nest egg? What about that worst-case scenario—retiring just before a long-term decline in the stock market? Can your portfolio recover?

We decided to find out. In our Bear Market Case Studies, we’re looking back at one of the longest, steepest market declines in recent years—the drawdown sparked by the Great Financial Crisis—and examining the fate of different retirees with different approaches to risk.

Case Study #3: The 80/20

It’s October 2007, and you’ve just retired. Over the years, you’ve socked away $1 million in retirement savings, and you’re hoping to grow it further over the coming decades. The stock market has other plans: October ’07 is the start of a plunge that will decrease valuations more than 50% over the next 16 months.

We’ve recently looked at how your average investor (one with the standard, 60/40 allocation) and a more conservative type (with a majority of their portfolio in bonds, a 40/60 allocation) would have fared. But what if you were aiming to grow your money and decided to take on a little more risk, allocating 80% of your portfolio to stocks and only 20% to bonds? Would your retirement plans be in ruins because of that choice?

We won’t sugarcoat it: It got ugly, and it stayed ugly for a while. An investor with a more aggressive allocation would have seen their portfolio’s value decline 42% over the course of the bear market following the Great Financial Crisis—and that’s if they didn’t tap into the funds at all. A typical retiree, one withdrawing $3,500 per month from that portfolio, would have seen their portfolio’s value decline by 46%, falling from $1 million in October 2007 to a low of $537,520 in February 2009, at the nadir of the bear.

Ugly indeed. But not ruinous. Because the bear market did bottom, and stocks began a bull run that lasted over a decade. Even a stock-heavy, risk-on portfolio recovered, getting back to par in November 2013, or 57 months later. That’s just four months longer than it took a standard, 60/40 portfolio to bounce back. Adjusting withdrawal amounts to account for inflation adds only a month to that recovery time.

Dan Wiener’s View: Valuing Growth or Growing Value?

By Co-founder and Chairman Dan Wiener

The growth vs. value debate is in the news again. A well-known hedge fund manager has claimed that true value investing is dead, slain by the ETF juggernaut and those who have switched to computer-driven algorithms to choose stocks, labels be damned.

This comes at a time when “value” strategies have been outperforming “growth” strategies. Traditional value stocks like oil producers and utilities have taken the lead from their growthy tech and consumer-discretionary cousins. And Wall Street pundits are now claiming that value is poised to outperform into the future, while growth remains moribund.

If only it were that simple.

While the labels are an easy out, the trouble is that there are many definitions of what constitutes a growth or value stock.

A simple definition of a growth company is one where profits are growing faster than the markets’ overall. Of course, this ignores the fact that, for instance, biotechnology companies often show no earnings for years as they burn cash to discover the next great therapy. Amazon, one of the best-performing growth companies of all time, had zero profits to show for its growth for years. Still, I don’t think anyone would consider either Amazon or the typical biotech to be value companies, which typically see their shares selling for lower valuations relative to their earnings or book value, and which often pay a dividend.

Here’s where it gets tricky, though. Apple is certainly a growth company, but it pays a dividend. Many of the largest U.S. banks were, and still are, considered value companies, yet for years they paid no dividends at all.

Over the almost 45 years that the Frank Russell Company has calculated returns for large growth (Russell 1000 Growth index) and value (Russell 1000 Value index) stocks, neither has outperformed the other.

Value stocks and growth stocks have traded leadership and, as the chart so clearly shows, the points when style preferences turn can be swift. Attempts to time the changes are fraught.

Yes, there’ve been periods when growth beat value—such as the 26 months from December 1997 through February 2000 (up 31.8% annualized vs. 4.2% for value). Equally, there have been periods when value outran growth. Yet, at the end of the day, after more than four decades, growth stocks and value stocks have come out at the same place.

So, at Adviser we don’t try to trade styles. Diversification has always been a bedrock principle of our investment approach. We try to maintain a balance between value and growth stocks—particularly in our index-based strategies. This ensures we participate no matter which style is leading the performance derby.

When assessing the state of the markets and the state of your portfolio, I believe it’s important to ignore—or, at a minimum, be highly skeptical of—attempts to use simple labels to describe more complex investment strategies.

Instead, continue to focus on core investment principles including diversification, time in the markets and controlling risk in the furtherance of meeting your objectives and long-term goals. Don’t let the noise of the growth vs. value debate distract from the signals of smart portfolio management.

Chart of the Week: When Do Rate Hikes Start Working?

If you’re not frustrated, we definitely are! Since the Fed’s crusade to lower inflation began, it has raised interest rates from near 0% to north of 3% in a matter of months. These moves have lowered returns for both stocks and bonds and sent waves of volatility crashing across financial markets.

But are they working? The purpose of interest-rate hikes is to slow the speed at which money circulates in the system. Increasing borrowing costs slows the spending splurge in America, and it should help curb rising prices. All those market ups and downs may be turning traders’ stomachs today, but the Fed’s strong medicine is intended to heal the economy over the longer term.

The chart below explores potential paths for inflation vs. interest rates over the next 12 months, and it can help us tell whether and when hikes are finally doing their job. Here’s the good news: As early as February and as late as May, interest rates, as measured by the federal funds rate, should finally eclipse the inflation rate.

Why is this important? It means bond investors can earn a positive rate of return on their investments when adjusting for inflation. In other words, those lending money will benefit from doing so. Once this inflection point is reached, we expect bond market turbulence to ease.

Interest rates higher than the inflation rate are also indicative of a stronger financial outlook and economic stability, both items equity markets are begging for. If current trends continue, that crucial moment could arrive next spring. The short-term outlook remains cloudy, but there is sunshine appearing in the distance!

Watch Our Q4 Webinar!

Declines over the summer put us back into bear market territory as we head down the year’s home stretch. But is today’s economic environment as bad as the headlines make it out to be?

Hear Adviser’s take from our wealth management strategists via our Q4 Webinar, Outlasting Inflation and Bearing With the Bear Market. Interim Chief Investment Officer Jeff DeMaso, Manager of Financial Planning Andrew Busa and Vice President and Financial Adviser Elizabeth Kesselman gave their perspectives on the markets, the economy and how to manage through the current circumstances. Click here to register and receive the on-demand replay.

Adviser’s Takeaways

In recent Takeaways, Account Executive and Financial Planner Diana Linn discussed National Estate Planning Awareness Week, while Senior Research Analyst Liz Laprade discussed the state of the Chinese economy and stock market.

We hope you find these episodes engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to info@adviserinvestments.com!

About Adviser

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.