in challenging times.
E D U C AT E D I N V E S T O R
Is This What Buying Low Feels Like?
We regularly hear the investment mantra “buy low and sell high,” which sounds
like an easy strategy to follow. However, many investors fail to execute that
rule because times like these show us what buying low really feels like — it’s
As many wonder whether we have reached the bottom of the bear market and
what may happen next, now is a crucial time for investors to make decisions about
how they will position their portfolios going forward. Below, we provide several
historical examples that may help investors decide if now is the right time to
Reasons for Investing in the Equity Markets Now
Trying to Time the Market Bottom
Many investors worry about timing the investment of their assets in the markets.
During periods of extreme volatility, they wonder whether they should wait until
they are sure the market has bounced back from its low before investing their
money. We believe timing the tops and bottoms of markets is difficult to achieve
with any precision. Let’s look at some illustrations to evaluate the effectiveness and
potential drawbacks of trying to identify a market bottom.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
*TRadITIoNaL vs. CoRE First, let’s take a look at the scenario of investing $1 million halfway into the
aNd saTELLITE INvEsTINg
decline of the 2000-2002 bear market, a period in which the S&P 500 declined
a traditional portfolio by approximately 48% at its worst point. In this example, that $1 million would
typically involves a mix of have grown to approximately $1.5 million five years later if invested in a traditional
U.S. stocks, investment portfolio. Alternatively, a $1 million investment in a more broadly diversified Core
grade bonds and perhaps
and Satellite* portfolio would have grown to $1.8 million in 2006. So, although
some international stocks.
this hypothetical investor “got in too early” by investing before the equity market
In Core and satellite portfolio hit bottom, they actually realized attractive gains after waiting through the
design, core investments subsequent decline and recovery.
provide a broad foundation
comprising U.S. stocks, U.S. EXHIBIT 1: S&P 500 — InveSTIng $1 MIllIon (MM) Half-Way DoWn 3/24/2000–10/23/2006
fixed income and developed
market international equities. Value of $1MM Investment at Peak:
The main types of risk inherent S&P 500 Index = $1.00MM
Traditional = $1.48MM
in these investments are
Index Levels Core/Satellite = $1.80MM
those naturally associated
with bond and stock 1500
market returns — interest Invest $1MM at bear
rate and equity market market mid-point
risk (similar to the risk in
a traditional portfolio). 1100
Investors then surround
their core holdings with 900
satellite investments such as
emerging market debt, real 700
estate securities and high
yield bonds, etc. although
these investments introduce
Source: gSaM 3/24/00-10/23/06. Please see appendix for asset allocation breakdowns for Traditional and Core/
new types of portfolio risk, Satellite Portfolios.
they can also offer strong Returns include cash returns from peak to mid point. The hypothetical historical returns were created with the
diversification benefits and benefit of hindsight using the percentage allocations shown in the appendix. Simulated performance results do
not reflect actual trading and have inherent limitations. Please see additional disclosures. any changes will have
opportunities for skilled an impact on the hypothetical historical performance results, which could be material. Hypothetical performance
portfolio managers to capture results have many inherent limitations and no representation is being made that any investor will, or is likely to
excess returns. Whatever achieve, performance similar to that shown. In fact, there are frequently sharp differences between hypothetical
performance results and the actual results subsequently achieved. Portfolios are comprised of underlying indices.
the combination of satellites See appendix for Benchmarks and Blend allocation.
added to complement the core
of a portfolio, the goal is to
Now, let’s contrast these figures to a hypothetical investor who said “I’m going to
ensure that investors benefit
wait until the markets have clearly bounced back before investing my money” and
from the risk they assume.
deployed their $1 million halfway up during the recovery.
2 This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
EXHIBIT 2: S&P 500 — InveSTIng $1 MIllIon (MM) Half-Way UP 3/24/2000–10/23/2006
Value of $1MM Investment at Peak:
S&P 500 Index = $1.00MM
Traditional = $1.43MM
Index Levels Core/Satellite = $1.52MM
Invest $1MM at bear
Source: gSaM. Please see appendix for asset allocation breakdowns for Traditional and Core/Satellite Portfolios.
Returns include cash returns from peak to mid point of recovery. The hypothetical historical returns were created
with the benefit of hindsight using the percentage allocations shown in the appendix. Simulated performance
results do not reflect actual trading and have inherent limitations. Please see additional disclosures. any changes
will have an impact on the hypothetical historical performance results, which could be material. Hypothetical
performance results have many inherent limitations and no representation is being made that any investor will,
or is likely to achieve, performance similar to that shown. In fact, there are frequently sharp differences between
hypothetical performance results and the actual results subsequently achieved. Portfolios are comprised of
underlying indices. See appendix for Benchmarks and Blend allocation.
In this example, that $1 million would have grown to approximately $1.4
million by October 2006 if invested in a traditional portfolio as compared to
approximately $1.5 million if invested in a more broadly diversified Core and
Satellite portfolio. Compared to the previous hypothetical investor who invested
while the market was still headed downward, this investor had accumulated less
wealth regardless of their chosen portfolio structure.
The bottom line? In this example, trying to guess the “right” time to get into the
market, and/or waiting until the worst was over and the market began to rebound,
did not prove to be an effective strategy.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. 3
avoid the Possibility of Missing the Rebound
Although bear markets can be painful for investors, from a historical perspective,
they are less prevalent than market gains using the S&P 500 Index as a proxy.
Consider that from 1926 through 2008, investors have been rewarded over time
with more positive years than negative years. In addition, the positive return years,
on average, have been greater than the negative return years.
EXHIBIT 3: S&P CalenDaR yeaRS
1926 –2008 negaTIve yeaRS PoSITIve yeaRS
average Return –14% +22%
number of years 24 (29%) 59 (71%)
Source: gSaM, lipper
So let’s visit some of the specific “buy low” examples from the past. The picture
below highlights some of the worst periods of U.S. equity performance in history,
similar to what investors experienced in 2008. For those investors who were able
to overcome their emotions and “buy low,” they were rewarded with large port-
folio gains in the subsequent year. For investors who could not maintain a long
term investment focus and reduced their equity exposure, they locked in losses by
“buying high and selling low,” the exact opposite of what they say they want to do.
EXHIBIT 4: S&P 500 CalenDaR yeaR anD ToTal annUalIZeD ReTURnS
S&P 500 CALENDAR YEAR AND TOTAL ANNUALIZED RETURNS
DURING DURIng ReSPeCTIve BeaR MaRKeT PeRIoDS
BEAR MARKET PERIODS
1930: –24.9% 1931: –43.3% 1932: –8.2% 1930–1932: –61.0% 1933: 54.0%
1937: –35.0% 1938: 31.1%
1973: –14.7% 1974: –26.5% 1973–1974: –37.2% 1975: 37.2%
2000: –9.1% 2001: –11.9% 2002: –22.1% 2000–2002: –37.6% 2003: 28.7%
2008: –38.5% ???
Source: gSaM, lipper
In summary, we believe that although “buying low and selling high” may be
hard to execute from an emotional perspective, it is important to work with one’s
financial advisor to follow that age-old advice when appropriate. And, if you do
decide this is a good opportunity to “buy low,” we believe a broadly diversified
Core and Satellite investment approach offers a prudent strategy to help investors
achieve their long-term investment goals.
For more information on how to diversify your portfolio with a Core and
satellite approach, please contact your Financial advisor.
4 This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
equity securities are more volatile than bonds and subject to greater risks. Small
and mid-sized company stocks involve greater risks than those customarily associated
with larger companies.
Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely
affected by changes in interest rates.
Investments in commodities may be affected by changes in overall market movements,
commodity index volatility, changes in interest rates or factors affecting a particular
industry or commodity.
emerging markets securities may be less liquid and more volatile and are subject
to a number of additional risks, including but not limited to currency fluctuations and
foreign securities may be more volatile than investments in U.S. securities and will be
subject to a number of additional risks, including but not limited to currency fluctuations
and political developments.
High-yield, lower-rated securities involve greater price volatility and present greater
credit risks than higher-rated fixed income securities.
an investment in real estate securities is subject to greater price volatility and the
special risks associated with direct ownership of real estate.
exHIBITS 1, 2
assET CLassEs BENCHMaRk PoRTFoLIo PoRTFoLIo
U.S. large Cap S&P 500 Index 55.0% 16.7%
U.S. Mid Cap Russell Mid Cap — 6.6%
U.S. Small Cap value Ibbotson associates — 1.8%
U.S. Small Cap growth Ibbotson associates — 1.8%
International equity MSCI eafe 15.0% 22.1%
U.S. fixed Income Barclays aggregate 30.0% 21.0%
Commodities S&P/gSCI — 6.3%
U.S. ReITs fTSe naReIT — 1.5%
U.S. High yield Bond Ibbotson associates — 1.6%
emerging Markets equity MSCI eMf — 6.8%
emerging Markets Debt JPM eMBI — 7.4%
International Small Cap S&P/Citi eMI World ex — 3.9%
International ReITs fTSe glbl ReITs ex US — 2.5%
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. 5
The s&P 500 Index is the Standard & Poor’s 500 Composite Index of 500 stocks, an unmanaged index
of common stock prices. The Index is unmanaged and the figures for the Index do not include any
deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.
Ibbotson associates® is a leading authority on asset allocation with expertise in capital market
expectations and portfolio implementation. approaching portfolio construction from the top-down
through a research-based investment process, its experienced consultants and portfolio managers serve
mutual fund firms, banks, broker-dealers, and insurance companies worldwide. Ibbotson associates’
methodologies and services address all investment phases, from accumulation to retirement and the
transition between the two.
The unmanaged MsCI EaFE Index (unhedged) is a market capitalization-weighted composite of
securities in 21 developed markets. The Index is unmanaged and the figures for the Index do not include
any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.
The Barclays Capital U.s. aggregate Index represents an unmanaged diversified portfolio of fixed-
income securities, including U.S. Treasuries, investment-grade corporate bonds, and mortgage-backed
and asset-backed securities. The Index figures do not reflect any deduction for fees, expenses or taxes.
It is not possible to invest directly in an unmanaged index.
U.s. Three-Month Treasury Bills mature in three months. like zero-coupon bonds, they do not pay
interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to
maturity. Many regard Treasury bills as the least risky investment available to U.S. investors.
The FTsE NaREIT U.s. Real Estate Index series is designed to present investors with a comprehensive
family of ReIT performance indexes that span the commercial real estate space across the U.S.
economy, offering exposure to all investment and property sectors.
The s&P goldman sachs Commodity Index (gsCI) is a composite index of commodity sector returns
which represents a broadly diversified, unleveraged, long-only position in commodity futures. Standard
& Poor’s® and S&P ® are registered trademarks of The Mcgraw-Hill Companies, Inc. and gSCI™ is a
trademark of The Mcgraw-Hill Companies, Inc. and have been licensed for use by goldman, Sachs & Co.
The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity
universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800
of the smallest securities based on a combination of their market cap and current index membership. The
Russell Midcap Index represents approximately 31% of the total market capitalization of the Russell 1000
The MsCI EMF Index is the Morgan Stanley Capital International’s market capitalization weighted index
composed of companies representative of the market structure of 26 emerging market countries in
europe, latin america, and the Pacific Basin. The MSCI eMf Index excludes closed markets and those
shares in otherwise free markets that are not purchasable by foreigners.
The JP Morgan Emerging Markets Bond Index (JPM EMBI) covers U.S.dollar-denominated Brady bonds,
loans and eurobonds. Brady Bonds are dollar-denominated bonds, issued mostly by latin american
countries in the 1980s, named after U.S. Treasury Secretary nicholas Brady.
s&P Citigroup EMI global Ex-U.s. measures the bottom 20% of institutionally investable capital of
developed and emerging (after 9/30/1994) countries, selected by the index sponsor, outside the United
The FTsE global REIT ex-U.s. Index measures the stock performance of companies engaged in the
ownership, disposure and development of the Canadian, european and asian real estate markets.
6 This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
These examples are for illustrative purposes only and are not actual results. If any assumptions used
do not prove to be true, results may vary substantially.
Simulated performance is hypothetical and may not take into account material economic and
market factors that would impact the adviser’s decision-making. Simulated results are achieved by
retroactively applying a model with the benefit of hindsight. The results reflect the reinvestment of
dividends and other earnings, but do not reflect fees, transaction costs, and other expenses, which
would reduce returns. actual results will vary.
Indices are unmanaged. The figures for the index reflect the reinvestment of dividends but do not
reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest
directly in indices.
This information discusses general market activity, industry or sector trends, or other broad-based
economic, market or political conditions and should not be construed as research or investment
advice. Please see additional disclosures.
This material has been prepared by gSaM and is not a product of the goldman Sachs global
Investment Research (gIR) Department. The views and opinions expressed may differ from those of
the gIR Department or other departments or divisions of goldman Sachs and its affiliates. Investors
are urged to consult with their financial advisors before buying or selling any securities. This
information may not be current and gSaM has no obligation to provide any updates or changes.
opinions expressed are current opinions as of the date appearing in this material only. no part of
this material may, without gSaM’s prior written consent, be (i) copied, photocopied or duplicated in
any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or
authorized agent of the recipient.
This material is provided for educational purposes only and should not be construed as investment
advice or an offer or solicitation to buy or sell securities.
although certain information has been obtained from sources believed to be reliable, we do not
guarantee its accuracy, completeness or fairness. We have relied upon and assumed without
independent verification, the accuracy and completeness of all information available from
views and opinions expressed are for informational purposes only and do not constitute a
recommendation by gSaM to buy, sell, or hold any security. views and opinions are current as
of the date of this presentation and may be subject to change, they should not be construed as
IRs Circular 230 disclosure: goldman Sachs does not provide legal, tax or accounting advice. any
statement contained in this communication (including any attachments) concerning U.S. tax matters
is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties
imposed on the relevant taxpayer. Clients of goldman Sachs should obtain their own independent tax
advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. 7
Copyright 2009, goldman, Sachs & Co. all Rights Reserved.
Date of first Use: february 20, 2009 / 18685.Mf / PeRS-eI3