Combating Downturns

We live in an uncertain world. Unfortunately for investors, too much uncertainty can cause big swings in stock market performance. Although these times can be unsettling, there are steps you can take to help combat the effects of the downturns on your portfolio. Here’s what you need to know.

What Ails the Market: Uncertainty

Market ups and downs occur daily and have many causes. Some events or factors can lead to declines of 10% or more (known as market corrections) or even bear markets, which are declines of more than 20% over an extended period of times. These bigger downturns take hold when investors lose confidence in businesses’ abilities to meet their corporate goals and earnings forecasts.

One way to diagnose the degree of uncertainty is by looking at the Global Economic Policy Uncertainty (EPU) Index. It looks at the frequency of reporting on uncertainty in 21 countries.

Global Uncertainty on the Rise



The Global EPU Index is a GDP-weighted average of national EPU indices for 21 countries. Each national EPU Index reflects the relative frequency of a country’s newspaper articles that contain a trio of terms pertaining to the economy (E), policy (P) and uncertainty (U).
Data from 1/1/1997 to 10/1/2020. Source: “Measuring Economic Policy Uncertainty” by Scott R. Baker, Nicholas Bloom and Steven J. Davis at www.policyuncertainty.com.


Market Uncertainty 2020

Worries increased through the end of 2020 about a global resurgence in COVID-19 cases and the outcome of the U.S. presidential election.

Greater clarity on containing the spread of the virus, limiting the global economic impact and starting a new presidential term are needed to soothe market volatility.


Stay up to date on our market views with the latest Investment Outlook


Chicken Soup for the Portfolio: Diversification

Chicken soup is an age-old home cure for the common cold, now with plenty of evidence to back it up. Similarly, diversification is a known treatment to help manage for portfolio ills caused by uncertainty.

An example of market uncertainty and the impact of diversification is the dot-com crash in 2002, when technology stocks plummeted after enjoying a huge runup in prices. The magnitude of declines and ensuing recovery times were remarkably different depending on the investment mix and risk.

This is important because for every loss your portfolio experiences, you need an exponentially higher return to break even. Portfolios with different types of investments may fall less and recover sooner.

History Shows Diversification Works


Source: Morningstar. Technology sector represented by the S&P 500 Information Technology Index. Diversified portfolios are represented by Morningstar category averages as follows: Aggressive Risk – Allocation-70% to 85% Equity; Moderate Risk – Allocation-50% to 70% Equity; Conservative Risk – Allocation-30% to 50% Equity. See glossary for index and Morningstar category definitions.  


Prescription for Portfolios

No one can predict the best time to buy and sell investments. Making money and avoiding losses is more than just guessing at the market's direction. And research suggests that trying to time the market can do more harm than good.

When uncertainty is running high, we believe that the best course of action for a long-term investment strategy is to focus on diversification. Your financial health depends on a carefully constructed plan that aligns with your age, risk tolerance and goals for the future. Stay on track with periodic portfolio checkups.

Explore our variety of mutual funds to adjust your investment mix, or let our asset allocation portfolios do it for you.

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Combating Downturns

©2021 Morningstar, Inc. All Rights Reserved. Certain information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Definitions

GDP: Gross domestic product is a measure of the total economic output in goods and services for an economy.

S&P 500 Information Technology Index: An index that comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standout (GICS)® information technology sector.

Morningstar Allocation – 70% to 85% Equity (Aggressive): Funds in allocation categories seek to provide both income and capital appreciation by investing in multiple asset classes, including stocks, bonds and cash. These portfolios are dominated by domestic holdings and have equity exposures between 70% and 85%.

Morningstar Allocation – 50% to 70% Equity (Moderate): Funds in allocation categories seek to provide both income and capital appreciation by investing in multiple asset classes, including stocks, bonds and cash. These portfolios are dominated by domestic holdings and have equity exposures between 50% and 70%.

Morningstar Allocation – 30% to 50% Equity (Conservative): Funds in allocation categories seek to provide both income and capital appreciation by investing in multiple asset classes, including stocks, bonds and cash. These portfolios are dominated by domestic holdings and have equity exposures between 30% and 50%.