Cover Your Assets - Reducing Portfolio Drawdowns
After experiencing another market downturn during the first half of 2022, the market seemed to be starting to recover during July but lost its momentum around the middle of August and sunk back down before heading up again in the past week or so.
The events and circumstances which have been creating uncertainty and market turbulence do not seem to be dissipating.
The Optimum Mix fell substantially during the first few months of 2022 as it continued to invest in high-momentum large cap stocks and leveraged equity ETFs until those losses were slowed by phasing into cash over a couple of months as indicated by the algorithms.
As the market seemed to be recovering and then lost momentum, the algorithms have been phasing into and out of large cap stocks and leveraged equity ETFs.
This chart compares the loss in value of $10,000 invested in the S&P 500 from January 5, 2022, through September 12, 2022, with the loss in value of $10,000 invested using the Optimum Mix, TQQQ, and FNGU during that same period.
As mentioned previously, the strategic takeaway for this period and other speed bumps, corrections, and bear markets is to “cover your assets.”
The time to develop an action plan for the inevitable temporary setbacks is before they begin.
Following the rules of a backtested investing algorithm should help enable an investor to be dispassionate, systematic, and evidence-driven--and to reduce portfolio drawdowns during bear markets like the one we've been in since January.
Severe bear markets and rare black swan events with rapid substantial declines can be mitigated to some degree by systems which incorporate algorithms with manual stop loss orders and black swan indicators that indicate when to exchange stocks and leveraged equity ETFs for cash or leveraged bond ETFs.
Those algorithms also need to provide clear calls to action when it is time to switch back into stocks and leveraged equity ETFs.
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