Win More by Losing Less

Wealth Advisor

In this video, Chris emphasizes the importance of limiting downside risk and volatility in your investment portfolio. He presents an example of investing $100,000 in the S&P 500 index just before the 2008 financial crisis, showing how the investment experienced significant ups and downs but ultimately grew to $319,666 over a specified timeframe.

Chris then compares this to a portfolio that was designed to limit downside risk by removing half of the downside potential while also reducing half of the upside potential. In this scenario, the investment performed slightly better, with an ending balance of $320,245. The key takeaway is that minimizing losses is crucial because it often takes more significant gains to recover from losses.

The video underscores the importance of risk management and suggests that achieving consistent returns while minimizing losses can be a prudent strategy for long-term financial success. Chris encourages viewers to reach out with questions or for further assistance.

Video Transcript

Hi everyone, Chris here with EWA here to make a short video on the importance of limiting downside risk and volatility in your portfolio. So what we have here on the screen is an example, assuming you were to have invested $100 ,000 in the S &P 500 index on October 9th, 2007, just before the financial crisis.

This data is from October 2007 through December 31st, 2020. So if we take a look, the 100 ,000 would have gone down to 45, up to 283, then back down to 187 for an ending balance of $319 ,666. A great rate of return, you tripled your money, but during that timeframe, it would have been pretty scary.

You would have had to weather some storms and some down markets throughout this time. If we look at the same timeframe, but instead of investing just in the S &P 500, we invested in a portfolio where we were able to remove half of the downside risk by also removing half of the upside.

So if we take a look at the 100 ,000, instead of going all the way down to 45 ,000 in the previous example, you only went down to 65. 65 goes up to 282, and then this time instead of going down to 187, you only went down to 223. Ending balance here, 320 ,245. So actually slightly better simply because we limited the downside risk.

We also took roughly half of the gain off the table, but we didn’t go down as much when the downsides did occur. The next slide shows what you need to return, assuming a 5% loss, 10% loss, 20% loss, and so on. One of our favorite trick questions to ask is, say you start with $100 ,000, go down by 50%, you’re now at 50 ,000.

Say you got a 50% gain, where are you at now? Most common answer that we usually get is we’re back at $100 ,000, which is incorrect. In order to get your 50 ,000 back up to 100 ,000, you would need a 100% gain. This slide just shows the importance of minimizing those losses because if we experience a loss, it takes just as much more of that in gain, if not more, to get back to where we started.

So hopefully you found this helpful. We just wanted to provide some data to show why limiting the downside risk is just as important, if not more important, than shooting for high returns. If you have any questions, please feel free to reach out.

Happy to help.

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