The Case for Downside Protection

Downside Protection

We believe investors should prepare a downside protection plan for their savings.  We will be discussing in this presentation how downturns have become longer and deeper, how investors have typically changed their risk tolerance during a downturn, and that the old way of relying on a static diversified portfolio does not protect investors from the largest cost they can experience.

The need for a protection plan should be obvious.  Markets experience downturns, and as the past 60 years show, the longer and more enduring downturns have been the most recent.

A downside protection plan should be built knowing that investment markets have historically produced positive returns about 80% of the time.  It is only 10% of the time that markets have experienced a 10% or worst drawdown.  It is those infrequent times that drive the need for a plan.

The biggest risk to any downturn is not the magnitude felt but the emotional reaction by investors to that downturn.  People have shown a tendency to cash out only after the damage has been done.  And hold off on getting back in until after the markets have recovered capturing the loss but missing the rebound.

Studies show that this reactionary trading can cost the average investor about 2% annually.  That equates to about 25% of the historical annualized return of the market.

Looked at another way, emotional trading can impact the savings of a client by over a third 1/3rd in a 25 year investment horizon.

TitleDownside Protection
AudienceIndividuals, Families, Companies
Time2:43 Minutes