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Expert Perspective

News, research and market insights from our team of experts.

Investment e.Perspective

Current Issue | April 27, 2017

Okay…Now What?

By: Mark Green, CFA, Chief Investment Officer and Oxford Investment Fellow


  • "Should we use this pullback as a buying opportunity?"
  • "Should we sell now? I don't want to ride this market all the way down!"
  • "Why should we buy more of an investment that is already down 30% this year?!
  • "That other investment has had great performance so far this year. Shouldn't we buy more of it?"

We have heard all these questions – and more – in recent weeks, as investors react to the equity market sell-off in August-September and the subsequent bounce in recent weeks. The bulk of the decline happened quickly and caught many off guard:

  • In the equity market the S&P 500 Index declined 6.4% during the quarter, wiping out all of the gains over the past year. Peak-to-trough, the S&P 500 fell 11% during the sell-off - barely edging into the 10% to 20% "correction" range. Small-cap domestic, international and emerging market equities were all hit even harder.
  • The performance of the bond market – typically a natural hedge against equity market weakness – was mixed. US Treasuries rose in value, though not as much as might be expected, thanks in part to massive selling by the Chinese central bank. However, bonds with any sort of credit risk, such as lower quality investment grade and high-yield corporate bonds, struggled during the quarter. The broad-based Barclays US Aggregate Bond Index rose a mere 1.2% for the quarter, accounting for all of the 1.1% gain over the past year.
  • Even hedge funds, designed to have low correlation with stocks and bonds, offered little shelter from the storm. The HFRX Global Hedge Fund Index declined 4.3% in the third quarter and is down 3.0% over the past year.

The financial markets in general have stabilized in recent weeks, with the broad equity market showing substantial recovery from its lows. It is tempting to think that the long-awaited market "correction" is over and it is safe to add more equity risk to the portfolio. Yet the concerns we have expressed in recent months, which have led us to recommend reducing overall portfolio risk, are still in place – or have actually gotten worse:

  • The US is now the only engine of global economic growth, which continues to slow on balance, putting downward pressure on corporate earnings.
  • Market valuations remain lofty for both stocks and bonds, providing little margin of safety for owning financial assets at current prices.
  • Monetary policy remains highly accommodative worldwide, as virtually every Central Bank fights against the prospect of deflation.

With all that being said, the answers to the questions at the beginning of this piece may be different from one investor to the next. The distinction depends entirely on their investment objectives (return requirement, risk tolerance) and constraints (time horizon, tax sensitivity, liquidity preference, etc.), all of which should be documented in a well-crafted Investment Policy Statement. Such a tool helps neutralize the effects of emotion and provides structure around the investment decision making process.

Rigorous analysis and a sound investment philosophy are also critical for long-term success. Examples of these last two can be found in the accompanying articles this month – Bob Schaefer outlines Oxford's Investment Philosophy and Jim Mahoney addresses the changing climate for risk assets.

As always, you are encouraged to contact us for further information.

The above article represents the opinions of the author as of 10.29.15 and is subject to change at any time due to market or economic conditions or other factors.