Risk Versus Return

When it comes to investing, Risk is often overlooked. Investment firms and investors tend to only focus on total Return.

There are many ways for Potomac to measure risk, and it is important to incorporate all methods in our investment research.

However, we prefer to focus our time on the risk concept of maximum drawdown. This term may be unfamiliar, as it is not widely used in the financial media. We feel that it is the best real world measure of risk.

What is Maximum Drawdown?

Maximum drawdown is the magnitude of decline from an investment's highest value to its lowest value during a given period.

For example if investments A and B both return 15% for the year, it is important to analyze how deep the declines were in order to reach this return. If investment A declined 35% on its way to reaching 15% and investment B declined 10% on its way to reaching 15%, investment B is clearly less risky.

Why is this Important?

The majority of the investors we work for have long-term investment objectives, but life can throw curve balls. Unforeseen events like health emergencies, pre-retirement expenses like college education, and even early retirement may be reasons to withdraw funds from your account earlier than anticipated. Potomac closely monitors and works to minimize drawdown so that, even if you withdraw funds in a down market, the decline in your account could be minimal.