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Risk Management

"I have 2 rules for investing.

Rule #1 is don't lose money.

Rule #2 is never forget rule #1."

                                        -Warren Buffet


We believe that risk management is essential for successful investing.  Stonebrook Digital Wealth offers a range of model portfolios that attempt to limit the losses investors experience during stock Bear Markets. Bear Markets are defined as a loss in value of the market by 20% or more.  On average a bear market occurs once every 10 years. Extreme examples of bear markets are 2008 (the financial crisis) and 2000 (the dot com bubble).  In each instance, investor loss was very significant.  Since we know that another bear market in stocks will happen, we believe it is wise for investors to manage risk in their portfolios

One method for reducing volatility and potentially reducing loss is diversification.  Diversification is the primary tool used by advisors to limit risk in portfolios.  But is it enough? The data suggests that simply diversifying portfolios may not be enough to protect investors from extreme bear markets. Consider the following:

Over the last 15 years, an all stock portfolio had annual returns of 8.9% annually.  However, in order to get those returns the investor needed to withstand a decline in value of over 55%.  This is simply way too much for most investors to withstand.


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A diversified portfolio of 60% stocks and 40% bonds was able to reduce the maximum drawdown, but investors still saw declines of over 35%.  This too, is more than many invetsors can tolerate.

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By adding a simple trendfollowing strategy to the 60% Stock/40% bond portfolio maximum drawdown is reduced even further.  In the example below the portion of the portfolio that is invested in stock (60%) is transferred to cash whenever the S&P500 dips below its 200 day moving average. The result is  maximum historical drawdown of 15.2%- less than half of the decline of the diversified (60/40) portfolio.


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Our tactical models take the trendfollowing concept a step further, using sophisticated market indicators to determine when the market is unsafe.  Investing in our model portfolios can potentially protect your portfolio during the next market downturn.

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* 1/1/2004-11/27/2019. Past performance is no guarantee of future results. Data from portfolio visualizer

Need more details? Contact us

We are here to assist. Contact us by phone or email.

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