Roger Gibson on the Market Crash

Last summer I had the opportunity to meet one of the true thinkers in the financial advisory industry, Roger Gibson, and listen to him speak about developments in asset allocation theory since the publication of his seminal 1989 book "Asset Allocation: Balancing Financial Risk." He was interviewed recently in an industry publication and his commentary was thought-provoking as always. Some highlights:

In early 2009 his firm did a study of Morningstar's entire database of mutual funds: 3,734 invested primarily in U.S. equities, 978 invested in non-U.S. stocks, 144 in U.S. and non-U.S. real estate and 128 natural resource stocks. They found one U.S. equity fund that had a positive return in 2008. That's it. Almost 5,000 mutual funds, and all but one lost money.

He also talked about something this blog has discussed in the past: that the losses of 2008 were extreme, but not altogether unexpected. Using historical statistical mean and standard deviation figures, Gibson calculates that 5% (2.5% on the low side and the same on the high side) of returns in the market are expected to be more than two standard deviations from the average of about 12%; that is, higher than +52% and lower than -28% . (This assumes that returns are distributed on a relatively normal, although not exactly perfect, bell curve.) Looking back to 1926, market returns fell into the lower 2.5% of expected three years: 1931, 1937, and 2008. They also landed in the higher 2.5% of expected two years: 1933 and 1954. More proof that 2008 did not signify a new paradigm based just on poor returns.

The whole article only takes about 15 minutes to read, and is worth reading in its entirety. Find the link to it here on our website. I'll close with a direct quote from Gibson which should give optimism for those who have kept the faith in capitalism:

"During times of excessive optimism, people overshoot markets on the high side, and during times of extreme fear and panic, markets overshoot on the downside. In 2008, people panicked and dumped securities, which sets the stage for higher-than-normal rewards for people holding on."


Drucker, David. "Roger Gibson on the Market Crash." MorningstarAdvisor Online. March 26, 2009