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April 1, 2018 by David E. Hultstrom

Beware Fighting the Last War

John Bogle has cautioned, “Too many investors-individuals and institutions alike-are constantly making investment decisions based on the lessons of the recent, or even the extended, past.”

Here is a chart of the major asset classes sorted by the differences between the penultimate downturn and the last one:

Asset Class 8/2000 – 9/2002 10/2007 – 2/2009 Difference
DJ US REIT 21% -66% 87%
Alerian MLP 59% -28% 87%
R2000V 8% -51% 59%
GSCI 6% -49% 55%
R3000V -18% -54% 36%
R1000V -19% -54% 35%
MSCI EAFE Small -25% -57% 32%
Barcap Long 30% 4% 26%
R2000 -25% -51% 25%
Barcap 5-10yr 30% 6% 24%
MSCI EM -34% -57% 23%
CSFB HY -2% -24% 22%
Barcap AGG 25% 7% 18%
Barcap 1-5yr 22% 8% 14%
MSCI EAFE -42% -55% 13%
ML Conv. -27% -39% 13%
3Yr TSY 23% 11% 11%
R3000 -40% -50% 10%
DJ Broad Stock Mkt. -40% -50% 10%
R1000 -41% -50% 9%
S&P 500 -41% -50% 9%
3Mo TSY 8% 2% 5%
6Mo CD 11% 6% 4%
3Mo CD 9% 5% 4%
BLS CPI 5% 2% 3%
R2000G -51% -50% 0%
R3000G -58% -47% -11%
R1000G -58% -46% -12%

As you can see, owning REITS, commodities, small value stocks, and MLPs all were great in the dot com aftermath and fixed income did really well also.  While the S&P 500 was going down 41%, equal weighting of the four assets mentioned earlier would have been up 24%, and an equal weighting of the four fixed income indexes highlighted would have been up 27%.  Thus a 75/25 portfolio (pretty aggressive) of 50% S&P 500, 6.25% each in the 4 fixed income assets, and 6.25% in the 4 other assets mentioned would have been down 8.1% in the earlier downturn.  But in the more recent financial crisis it would have been down 35.7%.

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