Market Drawdown Minimization

Explaining Market Drawdown Minimization

Capital markets...

...whether equity markets, bond markets, or real estate markets, are inherently risky and subject to changes in value. For example, the US equities market, as represented by the S&P 500 index, hit a level of 1549.38 on October 1, 2007, but was then at 735.09 on February 1, 2009. By July 1, 2013 the index had recovered to 1685.73.*

Shifts in any one market...

...such as each of these shifts in the equities market would impact the portfolios of investors who hold equities in their portfolios. If an investor is 100% invested in US equities, for example, a 10% drop in the US equities market would cause a 10% drop in their investment portfolios. Such a portfolio is thus subject to the ups and downs in that given market.

Being subject enitrely to the fluctuations in any one market, means that the value of a portfolio will only follow the price movements of that market, whether those price movements are good or bad, and desirable or not.

The Role of Market Drawdown Minimization in Investment

An investment strategy that includes a variety of asset types, spread across different markets, will lead to a portfolio that is less subject to the fluctuations in any individual market, ideal for an investor who would prefer to avoid exposure to all of the effect of a large drawdown in one market.

At 2nd St. Capital, we aim to spread investments across different markets so that we can minimize the extent to which portfolios are impacted by extreme changes in any individual market, i.e., to aim for “Market Drawdown Minimization.” As one example, as of the end of 2016, in any given month a 1% drop in the S&P 500 index resulted in a 0.36% drop in our benchmark portfolio, on average.

*Source: Yahoo Finance; Accessed March 22, 2017.