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Risk Controlled Portfolios

Controlling Risk

When markets go up, all investments go up, and when markets decline, all investments decline in value as well. The successful investor captures as much of the up market as possible and avoids as much of the loss of value in a declining market as they can.

In fact, in volatile markets, preserving market value in down markets can have a larger long-term impact than garnering the gain in up markets.Slide1

Consider the last decade: 2001 through 2010 had two of the most severe market downturns since World War II. As the chart above shows, an all equity portfolio, represented here by the returns of the S&P 500, had both higher highs and lower lows in practically every year than a less volatile portfolio of half equities and half fixed income investments.

The chart below shows the compounded effect of each portfolio over the course of the decade. The less volatile balanced portfolio out-performs the all equity portfolio by a significant amount, despite only having a greater gain in one of ten years. The out-performance of the balanced portfolio is due to preserving market value in 2001, 2002 and 2008.

Slide2

The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500® Index is heavily weighted toward stocks with large market capitalization and represents approximately two-thirds of the total market value of all domestic stocks. The “50/50” portfolio is a hypothetical portfolio made up of 50% of the return of the S&P 500 and 50% of the return of the Barclays Capital Aggregate Bond Index which tracks most US-traded investment grade corporate and government bonds.