This picture is the result of a conversation I had last Saturday with a wise, articulate, experienced, fund manager who has been running a hedge portfolio in Switzerland.
Drawdown was a related topic. He said this fund was down 30% or more. I said I didn't think so--that it was more like 20% based on my recent calculations.
When I went back and checked, I found it Is 22%. That's pretty bleak, exasperating or even handringing--an unwelcome delay on our journey to wealth.
Note that the drawdown completely distracted from the fact that I was 43% wealthier from the fund over the last two years than if I had been in the market or just stayed in cash. Still, what about the last six months if you came late to the party?
(Your maximum true risk is buying exactly at the price peak just before a drawdown starts. I will give you methods to reduce that risk in a moment.)
Context is so important. What you see here has to be viewed in a setting that enlarges and analyzes its normal and expected patterns of process. The shock of current action distracts powerfully from the setting of long lasting established behavior.
You recall the technique of examining performance by measuring portfolios over rolling periods. Look at this chart from two years ago. Note in that chart the repetitive patterns of both negative returns and portfolio-system returns worse than those of the market. These conditions are normal and expected accompaniments to the continued (but volatile) ascent of the wealth curve through time.
Rolling six-month returns repeat in one-and-a-half to two-year cycles. That's context. The same chart is updated to the present here >>> next.
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