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Roger Gibson on the Market Crash

A longtime expert on asset allocation strategy tells us why it didn't protect investors in 2008.

David J. Drucker, 03/26/2009

Roger Gibson is someone I've followed since entering the industry in the early 80s. He has long had a reputation as a deep thinker on the subject of asset allocation and portfolio design, particularly after publishing Asset Allocation: Balancing Financial Risk in 1989, which remains a best-selling book to this day.

I spoke to Gibson, the chief investment officer of Gibson Capital in Wexford, Pa., about the 2008-2009 market and economy.

Drucker: Do we need to somehow recognize and incorporate a new level of volatility in the asset classes we use?

Gibson: It depends on whether we're looking at short- or long-term volatility. Certainly 2008 was without much precedent in terms of how big the losses were and how far they stretched across all asset classes. For our year-end client communication, we studied Morningstar's entire database of 3,734 funds invested primarily in U.S. stocks. All but one lost money. Of the 978 funds invested in non-U.S. stocks, all lost money. Of the 144 U.S. and non-U.S. real estate funds, all had negative returns. And of the 128 natural resource funds, all lost money. So, if you add those numbers up, there were over 4,000 equity funds and all but one lost money.

Drucker: Since most portfolios are blended, one would ordinarily look to fixed income investments to help out. Did you study those, as well?

Gibson: Yes. Of 1,730 bond funds--both taxable and municipal--68% lost money, which surprised us. Those that didn't were government or short term bond funds. If you think about your distribution of possible returns from a diversified portfolio as being a bell-shaped curve, you've got this far left-hand tail in your distribution and we picked that "marble" out of the urn in 2008. I've never seen losses like 2008 but it wasn't something completely unthinkable. And when you have absolutely horrible, panic-driven significant losses, they're usually not just confined to a particular asset class. In 2008, panic fed on itself. I had more than a couple of sleepless nights in the last quarter as foreign markets were in a freefall because the U.S. markets were in a freefall, and the next morning U.S. markets were again in a freefall because foreign markets were in a freefall, and so on.

Drucker: Did you do any other studies of volatility our readers might find interesting?

Gibson: Well, I've never seen markets move as frequently and sharply as in last few months of 2008, so I had a staffer look at index movements for the S&P 500, the Morgan Stanley Far East Index, a REIT index, and the Goldman Sachs Commodity Index vis-a-vis the question: over how many trading days did these indices gain or lose 5% or more? The S&P 500, from January through August of last year, had no 5% days. From September through December, there were 18 days when the market moved 5% or more, and there were only 85 trading days, so that averages out to one out of five days, which is a lot! Similarly, the international market had no 5% days between January and August but, between September and December, had 28 days of 5% or greater movements. That's 33% or one out of three days. And the REIT market was even more volatile. During the January to August period, it moved more than 5% on seven days and, between September and December, there were 46 days, or over 50% of the index's trading days. Commodities were also more volatile with five days of 5%-plus movement from January to August and 18 days in the September-to-December period.

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