Investing Disaster

Avoiding Investment Disasters: It’s No Accident – Part 2

This is the second of two posts on how avoiding investment disasters is no accident. It takes careful and thoughtful planning.  

In our previous post (here) we discussed how a static risk management approach supplies too little protection in bear markets and too much in the bull markets.

In fact, a good analogy is to think of a static portfolio like an individual who dresses for all types of possible weather conditions but is actually ill-prepared for any specific condition… like someone wearing a ski parka and beanie cap while walking around in Bermuda shorts and flip-flops!

We believe a better way of managing risk is to use the disciplined and structured dynamic risk management approach. Simply put, dynamic risk management applies quantitative, fact-based assessments of three market time frames to determine overall market health and seeks to identify the conditions at which more or less risk management should be applied to a portfolio.

Imagine that…actively managing risk! The time frames are represented as Short-term (weeks-to- months), Intermediate-term (quarter-by-quarter) and Long-term(months-to-years). The sum of the time frames determines a market condition reading, ranking the broad market as either positive, neutral or negative.

The S&P 500 is an unmanaged market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. One cannot invest directly in an index. CAGR – Compound Annual Growth Rate.
**Maximum Drawdown is the maximum loss for a peak to a trough of a portfolio before a new peak is attained. Past performance is no guarantee of future results.

As seen in the above graphic, knowing what type of market you’re in is helpful in knowing how to manage risk in your portfolio. Look at how many days were either neutral or positive versus negative. Yet, look at the dramatic difference in return and total draw-down (volatility from top to bottom) in those time-frames.

Market conditions and knowing the strategies that tend to work better or worse with those conditions is helpful in managing risk long-term, especially downside risk. This doesn’t ignore the importance of diversification** and seeking to be in the areas of the market that show the best potential for return, bonds included. It simply enhances it.

John Templeton’s maxim that “bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria” is, I believe, playing out before us. How do you want to be prepared for the inevitable?

Remember, avoiding disaster is no accident. Let us show what we believe is a better way. Our firm’s constant goal is to grow our client’s capital while seeking to avoid disaster in the markets. We stand ready to help in any way we can.


The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guaranteed of future results. All indices are unmanaged and cannot be invested in directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

* Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

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