Sticking with Your Asset Allocation
November 05, 2015
Careful analysis can help investors pre-experience the outcomes they’re likely to see with various allocation decisions. But an investment plan will work only if an investor has the emotional fortitude to stick with it. That’s easier said than done, particularly with a more aggressive portfolio, when market conditions are rough.
Let’s look at the growth of $1 million in three portfolios from January 2005 through June 2015, assuming a withdrawal of $50,000 per year. In one case, the investor maintains a portfolio allocation with 80% in global stocks and 20% in municipal bonds. In the second, the investor stays in a much more conservative 30/70 portfolio. And in the third, the investor begins with 80/20, but panics after a 30% loss and switches out of stocks and into cash on November 1, 2008. He remains in cash through March 31, 2012, and returns to 80/20 thereafter.
The Display below shows how each of these investors would have fared.
With only 30% in stocks, the conservative investor wouldn’t have lost a great deal in the 2008 stock market slump, but neither would he have picked up much in the roaring bull market that followed. Altogether, after spending $50,000 a year, he would have ended up with $940,000 at midyear 2015—not too bad considering his regular portfolio withdrawals.
The steady 80/20 investor would have suffered a wrenching loss of 46% in the stock market slump, but she would have still wound up with the highest final portfolio value: $1,150,000, after spending outlays.
The market timer who jumped into cash as the stock market was going south and returned to stocks somewhat late would have been left with only $670,000, far less than both the steady 30/70 investor and the steady 80/20 investor. Indeed, his portfolio’s ending value would have been more than 40% less than the ending value of the 80/20 investor who stuck with her allocation, although his worst drawdown was nearly as large.
This illustrative case is—unfortunately—similar to what many investors actually did after 2008. Lots of investors who had flocked to global stocks in the years before the bubble burst stampeded out in 2009, 2010, and 2011, to the tune of $309 billion in outflows. It took until 2013—by which time the global stock market had already rallied 55%—for fund flows to flip back into stocks. In market cycle after market cycle, most investors sell low and buy high.
At Bernstein, we advised clients after the market slump to stick with their long-term strategic asset allocations, including their exposure to equities. One measure of the value of good investment advice, in our view, is the money saved by avoiding big mistakes. The value of that advice can be significant and quantifiable, as this example shows.
Even so, there’s a deeper dimension to good investment advice that goes beyond such numbers. Planning carefully and thoroughly can create greater understanding of investment trade-offs, which leads to better life decisions. These benefits are hard to measure precisely, but nonetheless hugely valuable.
The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.