This is what we seek to do every day. We are conservative investors by nature who truly believe that
by not taking too many risks, you can achieve better long term results and, more importantly, peace of mind.
Potomac Fund Management was founded in 1987 as a small-town firm with small-town values, ignoring the whims of Wall Street. Now, almost three decades later, Potomac is managing money with the same guiding principles.
There are very few people in this world who are truly aggressive investors. You may think you are aggressive until you get hit with a bear market.
As Mike Tyson once said,"Everyone has a plan until they get punched in the face."
Risk is often overlooked when it comes to investing. Investment firms and investors tend to only focus on total return without taking into consideration the amount of risk taken to generate that return.
When it comes to the market, capturing gains isn't as important as not losing money which can be devastating during bear markets. This truth is highlighted in the reality of Maximum Drawdowns and the Significance of Portfolio Losses.
There are many ways for Potomac to measure risk however the primary measure of risk that we tend to focus on is maximum drawdown. This term may be unfamiliar, as it is not widely used in the financial media but we feel that it is the best real world measure of risk.
Maximum drawdown is the magnitude of decline from an investment's highest value to its lowest value during a given period. Over time, this becomes the pain factor when investments decline in bear markets.
No matter what the long term results of any investments are, you must be able to tolerate the maximum drawdown to consider it a suitable investment choice for your risk level.
Avoiding losses, especially catastrophic losses is the most important thing you can do to secure your financial security. There are always opportunities to make money in the stock market, but once you lose your investment, it makes it that much harder to recover.
This is why it is so important you partner with someone with the experience and the resources to watch your investments around the clock.
The table featured here "Mathematics of Advances and Declines" demonstrates how difficult it is to recover from large losses. Don’t let this buy and hold tragedy happen to you.