Keep Your Investment Appetite in Check
Like grocery shopping hungry, market drops can skew judgment. History shows staying invested beats fleeing to cash after downturns.
Everyone knows it’s ill-advised to go grocery shopping when you’re hungry. Your appetite in the moment is different than in normal circumstances, so you’re likely to buy foods you’ll never actually eat. I break this rule all the time, which is how I end up with four boxes of frozen mozzarella sticks.
Similar caution should apply when it comes to asset allocations in the wake of market downturns. When stocks decline, investors may be tempted to move into cash in order to avoid any further losses. That’s only natural, as the appetite for risk likely changes following the first drop. However, history tells us that’s probably the wrong move. A balanced asset allocation of 60% stocks and 40% bonds has on average outpaced cash in periods following three-month market declines. An investor sitting on the sideline might eventually turn nauseous at the missed opportunity from a market rebound.
EXHIBIT 1
Appetite for Destruction
Average relative outperformance of 60/40 portfolio vs. cash allocation following a global equity decline of 10% or more, January 1999–December 2024
Index descriptions
Dimensional Core Plus 60/40 Index Allocation (Canada): Dimensional Index Allocation data compiled by Dimensional. 60% of the weight is allocated to global equity indices (described below), and 40% of the weight is allocated to the following fixed income indices: Dimensional Global Short-Term Government Variable Maturity Index (hedged to CAD) (16%), Dimensional Global Adjusted Investment Grade Bond Index (hedged to CAD) (14%), and Dimensional Global Targeted Credit Index (hedged to CAD) (10%). The equity allocation combines the following indices: Dimensional Canadian Core Equity Index (CAD), Dimensional Canadian Vector Equity Index (CAD), Dimensional US Core Equity Index (Canada) (CAD), Dimensional US Core Equity Index (Canada) (hedged to CAD), Dimensional US Vector Equity Index (Canada) (CAD), Dimensional US Vector Equity Index (Canada) (hedged to CAD), Dimensional International Core Equity Index (Canada) (CAD), Dimensional International Core Equity Index (Canada) (hedged to CAD), Dimensional International Vector Equity Index (Canada) (CAD), Dimensional International Vector Equity Index (Canada) (hedged to CAD), and the S&P Global REIT Index (gross dividends) (CAD). The weight of the REIT index is fixed at 4% of the equity allocation. Within the remaining non-REIT equity allocation, Canadian equities are held at 33.33%, then rescaled and rounded to the nearest 1%. US and international equities are held at their respective market capitalization weights and then rescaled to sum to the total non-REIT, non-Canada equity weight of the Index Allocation, rounded to the nearest 1%. Regional weights are determined at each quarter-end and held constant for the next three months. Within the Canadian equity allocation, each month the weights are allocated to the core and vector indices at 70% and 30%, respectively. Within each of the US and international equity allocations, each month the weights are allocated to the core, core (hedged to CAD), vector, and vector (hedged to CAD) indices at 35%, 35%, 24%, and 6%, respectively. The Index Allocation returns are calculated monthly as a weighted average of the returns of the underlying indices. The Dimensional Global Adjusted Investment Grade Bond Index (hedged to CAD) is represented by the Bloomberg Global Aggregate Bond Index (hedged to CAD) from January 1994 to January 1999. The Dimensional Global Targeted Credit Index (hedged to CAD) is represented by the Bloomberg US Aggregate Credit 1–3 Year Index (hedged to CAD) from January 1994 to December 2002. The Index Allocation has been retrospectively calculated by Dimensional and did not exist prior to March 2020.
The Dimensional indices used in the construction of the Dimensional Index Allocations represent academic concepts that may be used in portfolio construction. The Index Allocations and the indices are not available for direct investment or for use as a benchmark. Their performance does not reflect the expenses associated with the management of an actual portfolio. The Index Allocations and index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. The returns of indices presented herein reflect hypothetical performance and do not represent returns that any investor actually attained. Changes in the assumptions upon which such performance is based may have a material impact on the hypothetical returns presented. Hypothetical backtested returns have many inherent limitations. Unlike actual performance, it does not represent actual trading. Since trades have not actually been executed, results may have under- or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity, and may not reflect the impact that certain economic or market factors may have had on the decision-making process. Hypothetical backtested performance also is developed with the benefit of hindsight. Other periods selected may have different results, including losses. There can be no assurance that Dimensional Fund Advisors will achieve profits or avoid incurring substantial losses.
Disclosures
All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
These materials have been prepared by Dimensional Fund Advisors Canada ULC. This material is not a sales communication. It is provided for educational purposes only, should not be construed as investment advice or an offer of any security for sale, and does not represent a recommendation of any particular security, strategy, or investment product.
This material is not intended for Quebec residents.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns, including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
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