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Advisors - June 16, 2020

White Paper: Portfolios, Risk & COVID-19

No one could have predicted the COVID-19 pandemic or devastating market collapse it caused, but could investors have been better prepared?

While the record-length bull market from 2009-2020 rewarded many investors, it also caused complacency and set deceivingly low expectations for portfolio risk. This market crisis is unique in that a historically fast market sell-off immediately followed a historically long bull rally.

So we asked: Did an investor’s chosen risk tolerance make a difference? How did the rise of index funds contribute? Would a financial advisor have helped protect investor portfolios?

Access the full study and key insights:

The chart below illustrates one consequence of the 11-year bull market in US equities. When market performance is consistently strong, metrics that indicate a portfolio’s “worst case scenario” also trended lower—creating a potentially dangerous paradox for investors.

portfolio risk metrics and S&P 500

To better understand how COVID-19 and the ensuing market sell-off affected all investors, we studied trends in historical market performance, portfolio risk metrics and ETF and mutual fund flows. In doing so, we found the following:

1. Portfolio risk metrics are often inadequate based on their inputs, commonly recent market performance data
2. Awareness of diversification benefits and the potential pitfalls of ETF investing is vital for investors
3. Professional investing strategies like profit-taking and portfolio rebalancing can protect investors from the “worst case scenario.”


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