Limit Losses
For an investor pursuing long-term goals, large losses have a much greater impact than large gains, both mathematically and emotionally. In managing your portfolio, one of our top priorities is to regulate downside risk so that when the market experiences significant losses, your portfolio does not. That is not to say that we invest conservatively, rather that we do our best to make wise investment decisions in the face of a market downturn.
Over the last 110 years, the Dow Jones Industrial Average has rewarded investors with long-term growth. More specifically, if you had money invested in the market for all of the last 110 years, you would have significant gains. Like most investors, your investing time horizon is certainly significantly shorter – more likely 20-40 years. Consider the chart below, which details the bull and bear markets of the Dow Jones Industrial Average since its inception in 1896.
| Dates | Months | Years | Annualized Returns | Cumulative Returns |
|---|---|---|---|---|
| Dec 1896-Jan 1906 | 110 | 9 | 10.56% | 148.92% |
| Feb 1906-Jun 1924 | 218 | 18 | -0.24% | -4.92% |
| Jul 1924-Aug 1929 | 63 | 5 | 30.44% | 294.66% |
| Sept 1929-Nov 1954 | 304 | 25 | 0.07% | 1.69% |
| Dec 1954-Jan 1966 | 135 | 11 | 8.72% | 154.29% |
| Feb 1966-Oct 1982 | 202 | 17 | 0.05% | 0.83% |
| Nov 1982-Jan 2000 | 206 | 17 | 15.09% | 1,003.19% |
| Feb 2000-Dec 2008 | 108 | 9 | -2.44% | -19.78% |
The red boxes indicate time frames with low or negative annualized and cumulative returns. Notice that each period spans the 20 to 40 year window that applies to most investors. Although there were opportunities to make money in these time frames, most “buy and hold” investors likely did not make significant overall gains. To make money in these red phases, investors needed excellent risk management and tactical decision making.
