Why Active Management
It's important that you understand the impact that a bear market has on your capital. The give and take of your investment capital is not equal. If you placed $100 into an investment and it declined 50% to $50, what is the rate of return you would need to earn back your original investment of $100? Once you lose money, it takes a much greater return on the funds you have left to recapture your original investment. In this case, you would need a 100% gain on the remaining $50 to recapture your original $100 investment. These break-even percentages are shown in the table below, the .
Mathematics Of Declines And Advances
|Decline Amount||Advance Required to Breakeven|
Using the , the table below calculates previous bear market break-even points and highlights the painful effects that a declining market can have on your investment capital.
Bear Market Break-Even Analysis
|Bear Market||Duration||% Decline||To Breakeven|
|Sept. '29 - June '32||33 months||86.7||25.2 years|
|July '33 - Mar. '35||20 months||33.9||2.3 years|
|Mar. '37 - Mar. '38||12 months||54.5||8.8 years|
|Nov. '38 - Apr. '42||41 months||45.8||6.4 years|
|May '46 - Mar. '48||22 months||28.1||4.1 years|
|Aug. '56 - Oct. '57||14 months||21.6||2.1 years|
|Dec. '61 - June '62||6 months||28.0||1.8 years|
|Feb. '66 - Oct. '66||8 months||22.2||1.4 years|
|Nov. '68 - May '70||18 months||36.1||3.3 years|
|Jan. '73 - Oct. '74||21 months||48.2||7.6 years|
|Nov. '80 - Aug. '82||21 months||27.1||2.1 years|
|Aug.. '87 - Dec. '87||4 months||33.5||1.9 years|
|July '90 - Oct. '90||3 months||19.9||0.6 years|
|March '00 - Sept '02||30 months||47.3||?????|
Did you know that you would financially be better off to never lose money in any one year, and to only achieve half of the market's returns in the positive years?
|NASDAQ 100||NASDAQ 100|
|NASDAQ 100||Actively Managed||Actively Managed|
|Date||Buy & Hold||No Losing years||50% Of Losing Years|
|Break Even Point||38.33%||63.37%|
If you never lost money in the down market years, you would only need to capture 38.33% of the gains in the positive market years to equal a buy-and-hold position in the Nasdaq 100 index. More realistically, if your losses in the down market years were half the Nasdaq's losses, you would only need to capture 63.37% of the Nasdaq's gains in the positive market years to equal a buy-and-hold position.
The point we are making is that you don't need to equal or outperform the performance of the market in the positive market years if you protect your capital in the down market years. Protecting your capital in the down market years has an exponential effect on growing your capital over time. The objective with any money management strategy should be to reduce risk and maximize returns — with risk reduction being the most important factor. All other things being equal, you want to invest in the least volatile, highest reward, lowest risk strategy possible.
You may be reading this today because you are tired of giving all of your own assets, or your client's assets, away to a bear market. You may even be in the position where your retirement has been diminished to the point of having to change your retirement plans. Whatever the reason, you have probably come to the conclusion that there is another way to grow and protect your assets. ProfitScore Capital Management would welcome an opportunity to learn about your financial needs and discuss how we can help you achieve your financial goals.