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The Case for Balanced Investing in Bull and Bear Markets


Author: Sam Maness, JD CFP®

So far 2020 has given us some of the worst trading days and one of the worst months in the entire history of the U.S. stock market. Many investors lose hope during times like these, but here is some info that should lift your spirits:

  • The market is a ‘leading indicator’ and today’s prices reflect future expectations. In other words, the market can start improving before things get better. During past economic recessions, the average performance of both stocks and bonds was actually positive.
  • Painful times in the stock market are relatively short-lived, even if it feels like an eternity when we are losing money. Since 1950, ‘bear markets’ (declines of 19% or more) took on average just over a year to recover from the low point to reach a break-even.
  • We generally see above-average returns shortly after bear markets. Since 1982, the average one-year performance of U.S. stocks following bear markets was over 35%. The average annual return over three years was close to 15% per year. [1]

News reports often talk about ‘the stock market’ and reference the Dow Jones or the S&P 500 Index. These both follow large U.S. companies, but most investors also hold foreign stocks, as well as bonds, cash, and real estate. And within this world of investments, nothing stays on top forever. This chart from J.P Morgan shows how different investments perform over time. You can see that the winners and losers always change, but a balanced approach generally maintains the middle ground. The diversification in a balanced portfolio helps limit the range of outcomes, both good and bad. Going all the way back to 1926, a simple “50/50” stock & bond portfolio, using the S&P 500 and the 5-year U.S. Treasury bond, has produced negative rolling 5-year annual returns just 4.4% of the time. [2]

 This next chart provides investment results for a globally diversified 60/40 portfolio since year 2000, and compares those against returns for the S&P 500 Index. When the ‘market’ is up, the portfolio trails the index. When the market is down, the portfolio loses money, just not as much. But here is the kicker: by living in this ‘middle ground’ the balanced portfolio reduced your losses during tough times and beats the stock market index over the nearly two decades being tracked.

A balanced portfolio approach is important, but you also have to stay invested – this is how you really increase your chances of making money. This final chart tracks returns going back to 1950 and serves as a great example. Over one year, stocks have lost as much as 39%, a balanced “50/50” portfolio lost 15%, and even bonds fell 8%. After losses like these, many investors prefer the safety of cash. But now look at the 5-year and 10-year numbers. The returns become much more predictable, and the 50/50 portfolio was always positive.

A balanced portfolio approach can help weather storms like the one we are experiencing and provide a positive investment experience with time. If you work with an advisor, you might already have a diversified portfolio like the ones I've shared here. If you want to learn more about our approach and get a second opinion on how to invest your capital, please give us a call.

[1] https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market.pdf (March 2020 edition)

[2] https://awealthofcommonsense.com/2020/04/whats-the-worst-case-scenario-for-diversified-portfolios/

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. 

Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer's credit rating or other adverse news about an issuer can reduce the market value of that issuer's securities. When interest rates rise, the market value of these bonds will decline, and vice versa. 

Past performance does not guarantee future results. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Any examples included are hypothetical and for illustration purposes only and does not represent an actual investment. Individual investor's results will vary.  Illustration does not include fees and expenses which would reduce returns