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During the 2000-2002 bear market, the FTSE All Share ex-Investment Trust index fell almost 43% from its September 2000 peak to the February 2003 bottom.....

Sonya Morris, CFA 04.01.2009
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During the 2000-2002 bear market, the FTSE All Share ex-Investment Trust index fell almost 43% from its September 2000 peak to the February 2003 bottom. But those who held some bonds in their portfolios managed to limit their losses. A composite benchmark composed of 60% FTSE All Share and 40% Barclays Capital Sterling Aggregate Bond Index lost 21%, half that of the all-equity index. If you added a little real estate to the mix, your experience was even better. A combination of 50% FTSE All Share, 40% Barclays Capital Sterling Aggregate, and 10% S&P Global REIT Index held losses to 15% during that two-and-a-half year stretch.

Unfortunately, it hasn't yet worked

out quite so neatly amid the current downturn. Over the past 12 months through October 31, the FTSE All Share has plunged 34%. But unfortunately, bonds haven't held up nearly as well during this bear market and consequently, they haven't provided as much ballast to portfolios as they did in 2000-2002. The same 60%/40% stock/bond mix has resulted in losses of 22% over the past year. Adding real estate made matters worse this time around. The 50/40/10 stock/bond/REIT allocation has lost almost 27% over the past 12 months.

That's undoubtedly been frustrating for investors who thought that prudent asset allocation would help protect them in bear markets. But it's important to remember that each bear market stems from different causes. Conditions now are particularly severe, and the pain has been more widespread across asset classes and geographic regions. Indeed, market segments, which rarely move in lockstep, all headed south at the same time. The rarity of that occurrence only serves to underscore the exceptional nature of the crisis.

The current broad selloff has been influenced by technical factors that are unique to this bear market. Many large highly leveraged investors, like hedge funds, have been forced to sell off assets, but because of the fear gripping the markets, buyers have been few and far between. As a result, many assets have fallen to lows not entirely justified by their fundamentals.

But such mis-pricings present opportunities to long-term investors. Many of the managers we talk to have started to scoop up attractively valued high quality securities. But while that offers some hope amid the wreckage, these managers caution that there's still likely to be more pain over the short- and intermediate-term. So the path through this difficult market will undoubtedly require a strong stomach and a patient mindset.

Sonya Morris, CPA can be reached at

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Sonya Morris, CFA  Sonya Morris, CFA, is Associate Director of Fund Analysis at Morningstar.

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