Why low-risk trading wins

In the fund management industry, there is only one thing that counts: long-term positive annualized returns. This can only be achieved if the risk is managed properly.

In order to understand this, let’s have a better look at the investment approach of high-net-worth individuals. These individuals have been able to make large sums of money and are looking to protect & grow this over a long period of time. Most important is the protection against inflation. If you are worth 100 million dollars, imagine the effect on your net worth when inflation stabilizes at 3% annually. However, these individuals are not looking to generate exorbitant returns on their wealth because that often comes with a price. The price of huge downside swings due to a high-risk investment approach.

The S&P500, the most popular stock index, has an annualized return of around 11% and an average drawdown of 13% over a 60+ year period. Its deepest drawdowns lie between 20%-50%. The goal of an investment fund is to:

-Generate returns greater than the S&P500

-Keep the drawdown lower than the S&P500

Now, doing both these things at the same time has proven to be incredibly difficult. Just 6% of fund managers over the past 20 years have been able to beat the S&P500. The chances of investment funds surviving and growing over the long run are much greater if they focus on controlling drawdowns in periods of distress.

If you are a trader yourself, you will notice how your risk appetite changes when your account size grows. Your need for high returns diminishes because a lower percentage of returns can yield the same monetary result once your account grows.

An investment fund that offers stable annual returns, even if lower than the benchmark, and very controlled drawdowns will come out on top in the long run. This requires a low-risk investment strategy that is more focused on downside protection than excessive upside growth.

Speak to you soon!

Kind regards,

Joost