12 minute read
DC Strategies Hit Their Minimum Equity Targets
Will June 27, 2025, mark a pivotal moment in market history?
While investors celebrated the S&P 500 closing at a new all-time high of 6,173 points, something remarkable happened in the background. The DunhamDC portfolio algorithm triggered its sell signal, automatically reducing equity exposure to its minimum equity allocation as markets reached new heights.
This is not luck or market timing in the traditional sense. It is a systematic, disciplined approach inspired by Warren Buffett’s adage:
“Be fearful when others are greedy and be greedy when others are fearful.”
DunhamDC employs an unemotional, math- and time-based tactical overlay as part of our Asset Allocation Program. It Buys Fear and Sells Greed. For full strategy details, see here.
The Investment Allocation Paradox
In our view, Buffett hit upon a paradoxical irony regarding what he considered successful investing. Historically, the best time to reduce risk is when everyone feels most comfortable, and the best time to take risk is when everyone feels most afraid.
Consider the DunhamDC 60/40 portfolio as an example of our approach. When markets show signs of excessive risk taking and approach new highs, the algorithm trims equities from the neutral 60% down to as low as 20%.
That is what we call Selling Greed.
When fear peaks and markets fall, the strategy aims to increase equity exposure – to up to 100%.
We call this Buying Fear.
This means we have fewer equities as the market rises and more equities as the market declines and nears a bottom.
The Case of the DunhamDC 60
Let us look at our DunhamDC 60, which contains international stocks. Now in its third year since inception of November 30, 2022, it is an example of how the strategy systematically reduces equity at highs and increases at lows.
Figure 1: Dunham, June 2025
It Was Only a Few Short Months Ago
On February 19, 2025, the S&P 500 closed at 6,144, a new record high. At that time, the DunhamDC 60 portfolio (60% equities and 40% fixed income) was at 27% in equities. In the weeks ahead, as investors fled the market in fear and panic, the unemotional math-based strategy triggered, and bought equities, reaching a high of 47%.
As the market recovered, we were happy to sell equities back to the market at higher prices until the trigger on Friday when we made our final sale for now at those higher prices, and the equity allocation sits at 20%.
The J.P. Morgan Study(1)
J.P. Morgan Asset Management’s Guide to Retirement research supports why DunhamDC may offer a compelling investment approach.
They studied the equity markets from January 3, 2005, through December 31, 2024.
Throughout this period, staying fully invested in the S&P 500 turned $10,000 into over $70,000 (10.4% annual return). However, if one missed just the 10 best days, returns would have fallen to 6.2%.
This implies, according to the J.P. Morgan study, that missing these days can dramatically reduce overall returns.
Figure 1: J.P. Morgan Asset Management using data from Bloomberg. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. The hypothetical performance calculations are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown. The hypothetical performance calculations are shown gross of fees. If fees were included, returns would be lower. Hypothetical performance returns reflect the reinvestment of all dividends. The hypothetical performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data as of December 31, 2024.
So why are we quoting research that essentially says to stay invested in the market at all times, to follow a traditional “buy/hold” strategy?
It points to what we consider the wisdom of taking less risk at the top of the markets and more risk at the bottom of the market cycle.
This study pointed out that seven of the ten best trading days over the past 20 years occurred within just 15 days or less of the ten worst days.
This closeness of best to worst creates the perfect storm for the DunhamDC strategy.
The Tale of The Two Bear Markets
Let us see what this means in practice.
During the 2008 financial crisis, when the S&P 500 fell 38% from September 2008 to March 2009, seven of the market's 10 best days over the entire 20-year period occurred during this terrifying stretch. (2)
Figure 2: Investing.com, Dunham & Associates Investment, Inc., June 2025
During the 2008 financial crisis, markets whipsawed between massive gains and devastating losses. On October 13, 2008, the S&P gained 11.58% in a single day. Two days later, it plunged 9.04%. Three weeks later, it rocketed up 10.79%.
Traditional investors may have found investing in this type of volatility impossible. They may have sold into the October crash and missed the November rally. They may have bought back in after the recovery began, only to get crushed again in December. The emotional toll could have been devastating, and so might the financial results.
Figure 3: Investing.com, Dunham & Associates Investment, Inc., June 2025
DunhamDC was designed with such violent market volatility in mind - aiming to respond to sharp downturns and potentially benefit from periods of heightened fear.
Why This Matters for Your Clients
Consider what this means in practice.
When markets fall again, as they inevitably may, the algorithm systematically raises equity exposure as fear peaks. If some of the 10 best days closely follow some of the top 10 worst days, as J.P. Morgan's data suggests, DunhamDC will be positioned to take advantage of those rebounds with its systemic approach. Of course, we know that past performance is not indicative of future results.
That’s the difference. While traditional investors may panic or chase rallies, DunhamDC seeks to follow mathematical logic that disregards emotion and may lean into opportunity.
The Power of DunhamDC
This approach is grounded in a systematic response to market conditions rather than attempting to predict them. By recognizing that investor behavior often swings between fear and optimism, the strategy seeks to respond to these emotional extremes—aiming to participate in potential reversals that have historically followed such conditions.
The beauty lies in the unemotional approach. When markets move fast, there is no second-guessing, committee meetings, or paralysis. Just disciplined execution of what we consider a common-sense strategy.
Implementation for Your Clients
As advisors, we face the constant challenge of keeping clients invested through volatility while seeking to protect them from their worst instincts. DunhamDC provides a possible solution for both objectives.
When clients see their equity allocation drop to 20% at market highs, as we have this week, they understand the defensive positioning. When allocation increases up to 100% during market lows, they see the opportunistic logic of DunhamDC. The systematic nature removes emotion from their decision-making process.
More importantly, it provides a compelling story during difficult periods. Instead of saying "stay the course" during a bear market, you can explain how the algorithm may systematically increase their opportunity for potential future gains. Instead of worrying about market peaks, you can show how their risk is being reduced automatically.
What Happens Next?
Friday's trigger represents more than just a portfolio rebalancing. It implies the algorithm's assessment that current market conditions favor caution over aggression. With at least 20% equity exposure, the portfolio is positioned defensively while maintaining enough equity participation to benefit if markets continue climbing.
But here is the key.
The algorithm is now positioned and ready for the next fear cycle. Thus, when markets experience a downturn - whether in the near or distant future - DunhamDC is designed to respond systematically, increasing equity exposure during periods of fear when many investors may be selling.
This is not a prediction about market direction. It is simply preparation for what we consider market reality. Markets rise and fall. Fear and greed alternate like seasons.
The algorithm attempts to potentially profit from both.
Sources:
- JP Morgan Guide to Retirement, by JP Morgan, n/d, https://am.jpmorgan.com/us/en/asset-management/adv/insights/retirement-insights/guide-to-retirement/
- The Cost of Missing the 10 Best Days in the Stock Market, by Christian Hudspeth, CFP®, n/d, https://fmpwa.com/the-cost-of-missing-the-10-best-days-in-the-stock-market
- The Dow plunged into a bear market in just 20 days — the fastest 20% drop in history, by Business Insiders, n/d, https://markets.businessinsider.com/news/stocks/dow-index-bear-stock-market-20-days-fastest-history-coronavirus-2020-3-1028989775?
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Investors should consider the investment objectives, risk factors, charges, and expenses of the Dunham Funds carefully before investing. This and other important information is contained in the Fund's summary prospectus and/or prospectus, which may be obtained by calling (800) 442-4358. Please read prospectus materials carefully before investing or sending money. Investing involves risk, including possible loss of principal.
Past performance may not be indicative of future results.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There may be economic times where all investments are unfavorable and depreciate in value.
DunhamDC is a proprietary algorithm of Dunham & Associates Investment Counsel, Inc. (“Dunham”) that seeks to mitigate sequence risk, which poses a threat to an investor's returns due to the timing of withdrawals. The algorithm employs what Dunham considers to be a pragmatic strategy, generally making incremental increases to the equity allocation when global stock market prices decrease and decreasing it when global stock prices increase. This approach is objective, unemotional, and systematic. Rebalancing is initiated based on the investment criteria set forth in the investors application and is further influenced by the DunhamDC algorithm.
Due to the large deviation in equity to fixed income ratio at any given time, investor participating in DunhamDC understands that a large deviation in equity to fixed income ratio can have significant implications for the risk and return profile of the account. Accordingly, during periods of strong market growth the account may underperform accounts that do not have the DunhamDC feature. Conversely, during periods of strong market declines, the account may also be underperforming, as the account continues to decline, due to the higher exposure in equities. Similarly, if the fixed income investments underperform the equity investments, it is possible that the accounts using the DunhamDC feature may underperform accounts that do not have the DunhamDC feature, even though they may have adjusted the exposure to equity investment before a decline. Therefore, the investor must be willing to accept the highest risk tolerance and investment objective the account can range for the selected strategy. Please see the Account Application for the various ranges.
DunhamDC uses an unemotional, objective, systematic approach. The algorithm does not use complex formulas and is designed to create a consistent process with limited assumptions based on historical data.
DunhamDC may make frequent purchases and redemptions at times which may result in a taxable event in the account and may cause undesired tax-related consequences.
Trade signals for DunhamDC are received at the end of each trading day with the implementation of the trades not occurring until the next business day, which means that there is a one-day lag that may result in adverse prices.
DunhamDC operates within predefined parameters and rules, some or all of which may not be available to review. While this approach can reduce emotional biases and enhance consistency, it may limit adaptability to changing market conditions, economic considerations, or unforeseen events. Extreme conditions may require deviations from the program’s prescribed approach, and such adaptability may be challenging to incorporate. The DunhamDC algorithm is programmed based on specific criteria and rules, it may not capture certain qualitative or contextual factors that can impact investment decisions or movement in the markets. Beyond the initial assumptions used to develop the algorithm, it lacks other inputs or considerations that human judgement and discretion may be necessary to evaluate. DunhamDC may utilize historical data, statistical analysis, and predefined rules. It does not make any predictions and may add to certain investments before they perform poorly or may divest from other investments before they perform well. Dunham makes no predictions, representations, or warranties as to the future performance of any account.
Accounts invested in DunhamDC are subject to a quarterly rebalance to its target allocation at the time based on DunhamDC in addition to the signals provided by DunhamDC at any given time.
If the variance between any Dunham Mutual Fund’s target percentage of the total account value compared to the current percentage of the account value is greater than 1.00% at the time of the trigger point, the account in DunhamDC will be updated to the new target allocation.
Accounts invested in DunhamDC may contain non-Dunham Mutual Funds, which may materially impact if the account is being rebalanced at the trigger point.
Dunham makes no representation that the program will meet its intended objective. Market conditions and factors that influence investment outcomes are subject to change, and no program can fully account for all variables and events. The program requires making investment decisions based on factors and conditions that are beyond the Account Owner’s and Dunham’s control.
DunhamDC is NOT A GUARANTEE against market loss or declines in the value of the account or a timing strategy. Investor may lose money.
Asset allocation models are subject to general market risk and risks related to economic conditions.
DunhamDC has a limited track record, with an inception date of November 30, 2022.
DunhamDC US has a limited track record, with an inception date of July 31, 2024.
Risk Disclosures. An investment in the strategies and the Dunham Funds involves risks. For the Primary Risks of the Dunham Funds, please see: https://dunham.com/disclosures/dunhamfundsrisks.pdf
1 Market Growth represents the MSCI All Country World Index (ACWI).
The MSCI All Country World Index (ACWI) is a stock index designed to track broad global equity-market performance. Maintained by Morgan Stanley Capital International (MSCI), the index comprises the stocks of nearly 3,000 companies from 23 developed countries and 25 emerging markets.
S&P 500 Index - The S&P 500, or the Standard & Poor’s 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 Index components and their weightings are determined by S&P Dow Jones Indices. It differs from other U.S. stock market indices, such as the Dow Jones Industrial Average or the Nasdaq Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy.
Investors cannot invest directly in an index
As the Distributor/ Adviser of the Dunham Funds, Dunham & Associates Investment Counsel, Inc. receives a separate fee.
Dunham & Associates Investment Counsel, Inc. is an independent investment adviser and broker/dealer registered under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training.