[Insight & Opinion] Systematic Investment, Asset Allocation, and Stay the Course!

A History of Repeated Declines and Rebounds
Why an Unwavering Investment Strategy Is Essential

The U.S. S&P 500 index has fallen about 20% from its peak. The market is staggering under the shock of Trump's tariffs. Even experts are unable to grasp how Trump's tariff policy will unfold. Regardless of the reasons, looking at the numbers alone, the S&P 500 index has typically dropped about 20-30% every 4 to 5 years. Every other year, it has fallen about 10%, and roughly once every 30 years, it has experienced a major decline of 50%.

When the index drops 20-30% in a short period, a sidecar mechanism is triggered, and the media headlines it as a panic. The recent situation fits this description exactly. However, looking at the timeline broadly, these are just events that occur every 4 to 5 years. Of course, whether this downturn will continue to a 50% drop or successfully rebound is unknown. All we can do is refer to historical experience.

I have been investing monthly in a pension account through a systematic investment plan without missing a single month for 23 years. During this period, there have been many events such as the financial crisis and the COVID-19 pandemic. During these times, the gains accumulated were sometimes wiped out instantly. However, as time passes, for systematic investors, bear markets have also been opportunities to increase returns.

The basics of pension investing are systematic long-term investment and asset allocation. Since pensions are fundamentally long-term investments, short-term market timing strategies are meaningless. Unless market timing strategies continuously succeed (which is unlikely unless you are a deity), the ultimate winners are likely to be those who invest systematically and allocate assets over the long term.

John Bogle, the father of index funds, said, "Stay the Course." He advised to allocate assets among stocks, bonds, and others, not to pay too much attention to stock price movements, and to maintain your course. Especially in times like these, pension investors should heed John Bogle's advice. By the way, his motto was "Don't be shaken."

In the 1980s, performance analysis of asset management revealed that asset allocation has a greater impact on investment performance than stock selection or market timing strategies. Dr. David Swensen, former Chief Investment Officer (CIO) of Yale University's endowment who revolutionized fund management, emphasized that the impact of asset allocation on investment performance is not 100% but 120%.

Pension assets, by their nature, must be based on asset allocation. Especially in Korea, unlike the U.S., individual stocks cannot be invested in through pensions, making asset allocation even more important. Whether simply allocating between stocks and bonds or more broadly allocating across investment targets and regions, asset allocation is essential. However, in reality, it is not easy for individual investors to implement such asset allocation. Some outstanding individual investors can do it themselves, but many cannot. For this reason, products like TDF (Target Date Funds) have emerged as asset allocation products. Recently, various types of asset allocation products such as robo-advisors and wrap accounts have appeared.

When systematic investment meets asset allocation, volatility decreases and there is an effect of buying stocks cheaply during bear markets. It is a very simple method, but maintaining this course requires considerable patience. Sometimes, patience can be a more important investment strategy than exquisite stock selection or investment methods. We do not know for sure, but perhaps now is such a time. If you think so, you should follow John Bogle's advice and not move around but stay the course. Stay the Course!

Sanggeon Lee, Head of Mirae Asset Investment and Pension Center