Great Recession PTSD and Volatility Beating Portfolios

‘Great Recession’ PTSD and Volatility-Beating Portfolios

September 3, 2019

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 stock 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 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 dividends). 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.

Note: Chart shows the growth of a hypothetical $100 investment in the S&P 500 during the last three recessions (7/90–3/91; 3/01–11/01; 12/07–6/09) using daily total returns. Sources: Morningstar, NBER.

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 risks 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.


Please note: This update was prepared on Friday, August 30, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

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