![]() ![]() The market is made up of many investors, each of whom may look at the world differently. When the market moves as much as it did in 2020, a lot of common definitions and reference points we take for granted no longer work. Is any of these drawdowns more legitimate than the others? Very quickly, we can divine that the right drawdown answer lies in the eyes of the beholder. Since each investor has their own definition of a specific period, there can be multiple right answers for defining drawdowns. ![]() He pointed out that only a trader, not an investor, would call Peak to Trough using a 4-week intra-month period as a drawdown.Īccording to Investopedia, a drawdown is a peak-to- trough decline during a specific period for an investment, trading account, or fund. Therefore, claiming that fund had a “1- month” return of negative 42% is incorrect. The reader pointed out, also correctly, that the calendar monthly returns in Feb ’20 and March ’20 were negative 7% and negative 20% respectively. This is the return I had in mind and quoted when I wrote the article. The return between those 2 dates is ~ negative 42%. Just about 4- weeks later, it crashed and experienced a closing low of ~ $57. Starting the year around ~93, the fund rallied in late February ’19 to around $99. As a proxy for the Vanguard Real Estate fund, I have chosen the Vanguard Real Estate ETF (VNQ, a fund I own and like).Īs we can see from the price history in Column B, 2020 was a very volatile year for VNQ. I have picked some dates around the start of the Covid-19 Pandemic as it relates to my comments on Equity REITs in the TIPS article. How do successful investors practically and psychologically deal with drawdowns?įirst, let’s look at the calculations.How should we define it? How do most investors experience drawdowns? and.Part 2 of this question is also a great opportunity to discuss one of the most difficult and imminent problems in investing: Difficult part: why do the drawdowns matter and for whom?.(Would a 50% decline in your portfolio that lasted two weeks be “better” than a 25% decline that resolved in two months?) That’s a question worth pursuing. A lively exchange of views occurred, driven in part by different takes on how long a drawdown must last in order to be of material concern. That prompted a challenge from a thoughtful reader who has considerable expertise in the fund industry. To prove the point, I pointed to a one-month drawdown endured by the Vanguard REIT Fund during the Covid-19 pandemic of Feb/March 2020. Risky assets – Equity, REITs, and Stocks – while great for participating in long-term growth, are not good at capital preservation in tough market conditions. I mentioned that “part of an asset’s job is to help protect the portfolio during a financial catastrophe. This past month, Feb 2022, was a timely demonstration of the above reasoning. One, they do not respond well to inflation in the short-term and two, they act poorly in severe market drawdowns. In passing, I also noted the long-term potential role of domestic stocks and Equity REITS in protecting against inflation, while mentioning their two main drawbacks. I highlighted the promise of short-duration TIPS funds. The article was focused in particular on the performance of funds and ETFs with substantial exposure to TIPS (Treasury Inflation-Protected Securities) and similar products. My “ Thoughts on Inflation Protection” essay, which appeared in MFO’s February 2022 issue, focused primarily on the role of different major asset classes in providing an inflation buffer for your portfolio. ![]()
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