Complex World Of Investing

See the attached, I am always looking for ways to educate my clients, family and friends on this ever changing and complex world of investing.

This is a great research piece from one of our bond only managers that we sometimes utilize in our portfolios.  It is great to get perspective from a non equity manager as well as the equity guys.  They often shed some light and have a different perspective.  I particularly like the viewpoint on the term volatility and some great points made for us to all keep in mind.

Redwood Commentary

“Many investors may believe the terms “risk” and “volatility” are synonymous. The key difference is that while volatility can come and go, risk to the investor is always there. In our opinion, the risk of any investment should be evaluated by the greatest expected potential loss or drawdown. For example, equities may experience volatility periodically, down 10- 20% during a correction, but the risk of the correction turning into a 20%+ drawdown or bear market exists. Thus, investors in equities need to prepare beforehand to accept this type of risk. To the same extent, an investor’s risk tolerance shouldn’t change as a reaction to volatility in the markets. From our perspective, today’s volatility versus tomorrow’s volatility is irrelevant from a risk tolerance objective.”

“S&P 500 Index Declines in Perspective – The Deeper the Stock Market Decline, the Longer the Recovery Declines in the S&P 500 since December 31, 1945 (Post WWII) Sources: Bloomberg, Redwood. Data as of 3/31/18. For illustration purposes only. An investor cannot invest directly in an index. For additional information please see disclosures at the end of this commentary. History doesn’t always repeat itself, but it often rhymes. Looking at the above chart for context, markets historically tend to recover over time. The question is how much time and how severe a pullback can an investor handle without capitulating. A 5-10% drawdown on average only took 3 months to recover, providing some comfort to the most recent pullback. However, the data shows that the larger the decline, the longer it historically takes to recover. A drawdown in the S&P 500 Index of 20%+ led to a 2-year recovery time, on average. This is why we believe it is important to have an active, tactical, risk-managed component in a portfolio that seeks to reduce exposure, with the goal of avoiding larger drawdowns”

Redwoods approach to managing risk and long term strategies are very much in line with ours at Formula Folios, and that is why we like to use managers with expertise in their discipline that are like minded.

Food for thought, as always I am available for questions and feedback.  Click Here to Contact Us.

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