The Great Recession of 2007-2009 and the bear market that attended it caused great damage to most parts of the U.S. and world economy, and to pension funds, defined contribution plans, endowments and foundations.
While a number of economic commentators warned that a housing bubble was growing, none foresaw the damage the bursting of that bubble would do to the financial markets and the economy. As a result, few investors took action to protect their portfolios against the possibility of even a mild bear market.
Had they seen it coming, investors could have cut the stock allocations in their portfolios and increased their long-term bond exposures; and had capital gains in the bond portfolios, as interest rates tumbled, to offset the losses in their stock portfolios caused by the stock market crash. At the very least, they could have increased their funds’ cash positions.
Given the near impossibility of correctly anticipating the next recession and attendant bear market, fund executives should be taking steps now to minimize the damage to their portfolios when those events do occur.