We listen to our friends and colleagues who only boast when they are doing well. Our emotions cause us to want to be part of the crowd. The gradual decline in the price of a security or other investment between its high and low over a given period. The company may receive the funding gradually over the course of the project. The index has a base value of AUD3133.3, equal to the value of the All Ordinary Shares as of March 31, 2000. In construction, a situation in which a company receives part of the funding necessary to complete a project. It is a market-capitalization weighted and float-adjusted index. In general, investors are too greedy when prices are high. Australia Stock Market Index (AU200) The S&P/ASX 200 is the most important stock market index which tracks the performance of 200 large companies based in Australia. At the forefront of those decisions should be the fact that large drawdowns destroy the capital you need to invest for your future. When investors make asset allocation decisions they should have their maximum drawdown at the top of their list of considerations. It is still important to understand that a drawdown is not a loss. Over the years I’ve known people who were exuberant that they were achieving higher rates of return only to have their portfolio destroyed in the next bear market. The graph shows that equity drawdowns have been far more severe and prevalent than bond drawdowns. You must preserve your capital in bear markets to be a successful investor! This is where many investors experience failure. Exhibit 1 is a drawdown or underwater graph, where each new stock or bond peak value is reset to 0 to focus the eye on drawdowns. Periodically we experience bear markets that last as long as 20 years. Over the last 200 years we have experienced a financial crises every 4-5 years on average. A good maximum drawdown is lower than the average of the market. Maximum Drawdownīear markets are a part of investing. Nine years of 10% annual gains followed by a 57% loss (2007-09 bear market) puts you at break even for the entire decade. Catastrophic.įive years of 15% annual gains followed by a 50% loss leaves you back where you started 6 years earlier. It takes a 300% gain to recover a 75% loss. It takes a 100% gain to recover a 50% loss. It takes a 67% gain to recover a 40% loss. It takes a 43% gain to recover a 30% loss. It takes a 25% gain to recover a 20% loss. It takes an 11% gain to recover a 10% loss. This is because you are losing the investment capital that could be making you money when your investments are rising. Notice how the required gain to break even grows exponentially the greater the drawdown. Keeping drawdowns as small as possible is more important than high returns. They rob you of the investment capital you once had to grow your portfolio. Investment Failure Caused By Large Drawdownsĭrawdowns destroy your future.
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