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Keep Your Investment Appetite in Check

Keep Your Investment Appetite in Check

  • Wes Crill, PhD Senior Client Solutions Director and Vice President at Dimensional Fund Investors

Everyone knows it is ill-advised to go grocery shopping when you are hungry. Your appetite in the moment is different than in normal circumstances, so you are likely to buy foods you will 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 is only natural, as the appetite for risk likely changes following the first drop. However, history tells us that is 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 a 60/40 portfolio vs. a cash allocation following a 3-month US stock market decline of 10% or more (February 1982–June 2025).

Keep Your Investment Appetite in Check

Past performance is not a guarantee of future results.

The 60/40 allocation is 60% Russell 3000 Index and 40% Bloomberg US Aggregate Bond Index and is rebalanced monthly.

In USD. US equity performance is measured by the Russell 3000 Index. There are 29 three-month periods where equities declined 10% or more. Of those, the 60/40 portfolio outperformed cash in the following one-, three-, six-, and 12-month periods in 20, 22, 21, and 25 periods, respectively. Cash is represented by the three-month US Treasury bill. Equity losses of more than 10% over three months trigger the move from a 60/40 portfolio to all cash. All performance results of the hypothetical models are based on performance of indices with model/backtested asset allocations; the performance was achieved with the benefit of hindsight; it does not represent actual investment strategies. The model’s performance does not reflect advisory fees or other expenses associated with the management of an actual portfolio. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the advisor’s decision-making if the advisor were actually managing client money. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. “Three-month US Treasury bill” source: US Treasury via Ibbotson/Morningstar. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Bloomberg index data is provided by Bloomberg.

This post was written and first distributed by Dimensional Fund Advisors. Above the Fray is a weekly newsletter providing timely investment insights on current market events and trends. Join our mailing list to receive future editions in your email inbox. You can also browse earlier editions of Above the Fray.

DISCLOSURES

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

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“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

RISKS

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

DISCLAIMER

Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.

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