This entails diversifying among and within a wide range of asset types whose returns are driven by different economic variables and outcomes while establishing an asset allocation policy that enables us to weather the storms we are sure to encounter in our pursuit of investment returns. If we cannot predict the arrival or impact of certain types of events that affect capital markets, we must prepare for market volatility-whenever it might occur-through prudent portfolio construction. Our portfolio construction process revolves around the idea that it is impossible to predict with any degree of precision the catalyst of the next global downturn-it could be a war, a revolution, an earthquake, a recession, an inflation shock, a policy mistake, a pandemic, a terrorist attack, anything.
By comparison, it took 361 calendar days, or 248 trading days, for global equities to decline 37 percent during the 2008 financial crisis. It was the fastest decline of 30-plus percent in U.S. As one example, compare global equity market performance during the bear markets of 2008 (economic crisis) and 2020 (health crisis).Īs it became increasingly evident in February that COVID-19 would not be contained, global equities retrenched 37 percent in just 33 calendar days, or 23 trading days.
But capital markets are also affected by events and crises that originate from outside the economic system.īecause exogenous shocks (e.g., natural disasters, wars, pandemics, etc.) often arrive with little warning, they can trigger sharper selloffs in comparison to recessions that are slower to materialize as part of the normal business cycle. Investors hoping to earn outsized returns commit vast amounts of money, time, and effort attempting to forecast economic growth, inflation, interest rates, corporate profits, and other variables that influence the performance of financial securities. In this article, we examine how key tenets of our investment philosophy have helped us navigate periods of uncertainty and reaffirm why our approach leaves us well-positioned to deliver favorable outcomes for clients in the years ahead. Liability-Driven Investing Establishes a Strong Foundation.Has Diversification Delivered as Expected?.For investors, what does it mean to be living in unprecedented times? Can we still rely on the foundational principles of our investment process to see us through this period of uncertainty? Or, do these unprecedented times call for a new approach to constructing investment portfolios and planning for the future? Table of Contents While humanity has endured other seismic and transformational events, few would argue with the assertion that we are now living in unprecedented times. For decades to come, experts from a wide range of fields-economics, psychology, sociology, politics, epidemiology, public health, and more-will work to understand how the global response to combat this coronavirus changed the world. The COVID-19 pandemic is a supernova in human history that is certain to have a lasting effect on many aspects of the human condition. If we cannot predict the arrival or impact of events that affect markets, we must rely on a time-tested investment philosophy
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