• How will the rising US 10-year bond yield affect your portfolio? read here

7 million reasons to protect the downside

13062018 downside

7 million reasons to protect the downside

We talk a lot about downside protection at Montgomery Global. Intuitively it seems like a very good thing. Who on earth ever wanted their money to take nose-dive? (Answer: nobody). But the idea of reducing downside risk immediately raises some questions, like: what’s the value of protecting the downside? Or, what do I have to give up to insure against the downside? And of course, how do I go about putting downside protection in place?

Today we will address the first of these three questions and look at the value of protecting the downside in equity market investing.

To do this let’s assume a very savvy investor, call him Frank, had invested a million dollars into global equities at the beginning of 1997. This would have been a smart move. Over the next 20 years to the end of 2017 , he would have turned his initial investment into almost $4 million. His experience is shown in the chart below. Well done Frank!

The last 20 years of global equity returns and (hypothetical) investor return for $1 million investment in the global equities index

Screen Shot 2018-06-12 at 2.55.53 pm

Source: MGIM

Now imagine Frank has a friend, call her Vanessa, who is even savvier again.

Vanessa found a way to invest in global equity markets starting in 1997 whereby she experiences all of the gains in the years that the market has a positive result, but when the market turns down she manages to avoid any losses. In other words, Vanessa has the same experience as Frank, but for these 6 years: 2000, 2001, 2002, 2008 and 2015 (the last of these two years is almost the same result for both investors given the very slight negative performance in each). What do you think Vanessa’s investment account would be after 20 years?

Well it turns out that Vanessa would have turned her initial investment into a whopping $11 million (actually a little more). Just by avoiding the down years (and only really 4 in particular), Vanessa has made well over $7 million more than her (and our) good friend Frank.

The last 20 years of global equity returns and (hypothetical) investor return for $1 million investment in the global equities index excluding negative years)

Screen Shot 2018-06-12 at 2.56.52 pm

Source: MGIM

Next week we will explore the idea of downside protection in equity investing further. But for now we can see it’s incredible value. To Vanessa it’s worth at least $7 million!

Christopher is a Portfolio Manager at Montgomery Global Investment Management. Christopher joined Montgomery in January 2015 after spending more than four years at LFG, the private investment group of the Lowy family, where he was most recently a senior member of the research team based in New York. Prior to this Christopher worked as a research analyst at One East Partners, a hedge fund based in New York, and as an investment banker at Goldman Sachs in Sydney.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

INVEST WITH MONTGOMERY

Why every investor should read Roger’s book VALUE.ABLE

NOW FOR JUST $49.95

find out more

SUBSCRIBERS RECEIVE 20% OFF WHEN THEY SIGN UP


6 Comments

  1. Likewise, if Vanessa missed out & had zero growth in 1998, 1999, 2003, 2009 & 2013 she would have ended up with $1M i.e. NO growth over the time period OR negative growth if you factor in opportunity costs or simply putting money in bank deposit.

    So for any investor that OVER THE LONG TERM:
    (i) doesn’t want the hassle of managing & losing money
    (ii) wants to earn more than a bank deposit
    (iii) doesn’t want to take the risk of going with an active manager that loses money

    They can invest in an ETF / passive fund manager OR find an active fund manager that beats the market over 20+ years – BUT they are as rare as hen’s teeth!
    see https://www.marketwatch.com/story/why-way-fewer-actively-managed-funds-beat-the-sp-than-we-thought-2017-04-24
    “The picture that emerged once S&P did that was sobering, to say the least. Over the last 15 years, 92.2% of large-cap funds lagged a simple S&P 500 index fund. The percentages of mid-cap and small-cap funds lagging their benchmarks were even higher: 95.4% and 93.2%, respectively.”

    Hopefully, the Montgomery funds will be one of the elite few that beat the index.

  2. Dylan Taggert
    :

    Good article Chris, would it still be 11 million if she was having to pay tax and brokerage for being in and out of the market during that time? Thanks Dylan.

Post your comments