It’s quite common for investors to struggle understanding that investing is not a sprint but rather a marathon. When deciding on investments it’s important to understand the long-term risk to reward value add of the product, which can be further defined and evaluated by the strategies drawdown. However, there will always be a handful of investors who select an investment based on the long term but start to judge and evaluate it on the short term. Some of this misalignment can be attributed to misaligned expectations but it’s mostly the lack of understanding about timing and market cycles.
Anyone who understands sequence risk knows how critical timing is to overall investment success. For example, if an investor decides to retire just before or in the early stages of a bear market, they may see a big decline in the value of their accumulated wealth that could complicate their entire retirement plan.
On the other hand, an investor who retires at the start of a bull market would see the value of their portfolio appreciate and likely be able to enjoy a comfortable and secure retirement with less financial pressures to worry about.
Different investors will have different experiences in the markets, depending on when they start investing. This idea was illustrated well in a recent article from “On Dollars and Data”, which examined total returns for stocks and a blended stock/bond portfolio over different 20- and 40-year periods. As one example, the chart below shows how 20-year returns for the S&P 500 diverged significantly over different decades, starting in 1901.
Born at The Right (or Wrong) Time?
Why Full Market Cycles Matter
The Value of Protection
As an unconstrained tactical investment manager, we position our strategies to offer investors some degree of protection from catastrophic investment losses. It’s like the way any type of property insurance works. Full Disclosure: Our strategies are NOT insurance and do not offer any sort of guarantee against losses.
For instance, as a homeowner, you buy insurance coverage for your property in the event of a devastating loss. In a place like the Florida coast, which is often threatened by hurricanes, it’s common to get hurricane coverage as part of a homeowner’s insurance policy.
Of course, hurricanes don’t follow any pattern—they appear randomly and follow unpredictable paths. Seven or eight years could go by without any sign of a single tropical storm. That could lead a homeowner to see no value in their hurricane insurance coverage.
But if a hurricane came in Year 9, you’d quickly appreciate the value of your hurricane policy. Without the protection offered by the insurance, you would have to pay for the loss of your home out of your own pocket. That’s generally not feasible for most people—unless you’re extremely wealthy, you probably couldn’t replace the value of your home from your savings alone. Instead, you would have to borrow from someplace else—your retirement savings, most likely—or just write-off the damage to your home as a total loss and move on.
Insurance works by protecting the value of your assets in the event of a devastating loss. Risk management works in a similar way, by acting like an insurance policy for your investment portfolio.
Risk management strategies generally don’t protect investors from all losses, but ideally, they will shield investors from most losses, specifically during catastrophic downturns. Without some degree of protection and the ability to react quickly to changing market conditions, the value of an investor’s assets would likely decline to a point where their financial future, their security and comfort, would be in jeopardy. To us, that’s a risk we believe investors should not have to take.