‘Great Recession’ PTSD and Volatility-Beating Portfolios

We’ve been fielding questions lately about recessions and their impact on investors’ portfolios. These questions aren’t surprising, as the last recession (the “Great Recession” from the end of 2007 through June 2009) overlapped with steep stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market declines. So, to many, the idea of “recession” is linked to big drops in portfolio values. But history paints a different picture.

Thanks to the Great Recession and the bear marketA period in which stock prices decline significantly from recent highs and remain below previous high marks for weeks or months. Generally, a decline of at least 20% in stock prices is considered the threshold marking the start of a bear market. that ensued, we think investors have become more sensitive to even minor economic hiccups or suggestions a slowdown is coming. That the Great Recession left lasting performance scars and traumatic memories is easy to fathom: From start to finish, the S&P 500 index declined 35.0% on a total return basis over the 18-month period.

It didn’t earn its nickname for nothing; that drop was unusually steep. And yes, if you were able to call the start and end of the recession in real time—and act with confidence—your portfolio would have benefited from avoiding it entirely.

However, we think timing a recession is a fool’s errand and, frankly, impossible. Only after a recession is long over does the independent National Bureau of Economic Research (NBER) actually pronounce the beginning and end dates. And even if you could get the economic tops and bottoms exactly right, that knowledge would have had limited investment merit in the past.

Looking back to the two recessions prior to the Great Recession, the data shows that investors fared significantly better than you might expect.

The recession during the dot-com bust lasted just nine months—from the beginning of March 2001 through November 2001—during which time the S&P 500 declined 7.3% (including reinvested dividendsA cash payment to investors who own stock in the company.). We saw an almost 7% decline in the S&P from its July-end high in the middle of this past month alone. It’s simply not something you can avoid. Think of it as a cost of doing the business of investing.

The experience in the nine-month-long 1990–1991 recession was markedly different. By the time it was declared over in March 1991, the S&P had gained 7.2%.

You can see in the chart below how an investment in the S&P 500 would have performed during each of the last three recessions.

You shouldn’t assume that recessions inherently mean losing money in the markets. A judicious allocation to bonds and battleship-balance-sheet companies that pay dividends can enable a portfolio to manage stormy conditions—without requiring investors to sit at anchor in a safe harbor.

Our disciplined approach to portfolio construction is at the forefront of our investment management process.

Nonetheless, we aren’t going to sit on our hands if we feel economic or market conditions are taking a turn. Our disciplined approach to portfolio construction is at the forefront of our investment management process. For us, preparing your portfolio for the best and worst of times isn’t a last-minute scramble any more than it’s a knee-jerk decision based on so-called expert opinions.

We construct your investment portfolio with careful analysis and deliberation of all the known risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. and potential opportunities that we, and the scrupulously vetted managers we invest alongside, see.

At our core, we actively manage portfolios of active managers. One reason we seek talented managers is that they can and do adjust their portfolios to address current conditions. We do likewise, bolstering defenses if fundamental conditions weaken and increasing our offense if opportunity abounds.

Please contact us at (800) 492-6868 if you have any questions about your wealth management strategy or to schedule a free portfolio review. As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary.