A recent Wall Street Journal article epitomizes the new “conventional wisdom” that asset allocation failed in 2008.
It is true that correlations among major asset classes have increased in recent years giving the impression that asset allocation no longer works.
During the 2008 financial crisis all major equity asset classes experienced severe declines. Even commodities, which historically had exhibited low correlations to equities, dropped dramatically.
This does not mean that diversification and asset allocation failed.
- High-quality fixed income securities, i.e. U.S. Government bonds, of all maturities were a safe haven and had returns ranging from 1.6% to 25.8% percent in 2008.*
- Financial and economic shocks are rare occurrences, and investors must understand that they are part of the risk of investing in equity markets. Correlations historically have increased during economic shocks but returned to more normal levels as economic conditions normalized.
- Asset allocation depends on individual circumstances. If one has a high overall risk tolerance and a very long investment time horizon, accumulating shares during bear markets may be a wise strategy.
The major problem is, so many articles in the financial press are devoted to attempting to avoid investment losses. These articles make it seem that market timing can work for most investors. Many nervous investors needlessly adjust portfolio holdings, usually to their long-term detriment, in an attempt to grab the current “trend.”
In reality, alternatives like market timing, short selling, and stock picking have historically tended not to work as claimed for most money managers.
Your best bet for financial success is to stick to your plan and your appropriate asset allocation.
*Source: DFA Returns 2.0; One-month T-Bills and Long Term Government Bonds, respectively.
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