Understanding Risk is The Key to Success
There are many factors that cause the prices of stocks, bonds, mutual funds, variable annuities and other forms of investments to fluctuate. Interest rates, inflation, deflation, legislation, foreign exchange rates, political unrest, natural disasters, trade imbalances and employment rates are just a few. These factors all contribute to volatility in the market – volatility, which contains the potential for risking loss of capital.
Avoiding loss of capital is the key to long-term success
Since every market fluctuation contains the potential for gain or loss, the most successful strategy would be one that protects your capital when the market goes down. Successful investing depends on what type of investments you hold, investment techniques and the duration of the investment. Many times the difference between holding too long, or not holding long enough, is the difference between satisfactory gain or painful loss. In a sharp market decline, it does not take long before you start losing principal, and it may take a long time before you gain back those losses.
The Importance of Avoiding Large Losses
| Percentage Lost | Gain Required to Get Even |
| 20% | 25% |
| 30% | 43% |
| 40% | 66% |
| 50% | 100% |
| 60% | 150% |
The financial markets are subject to a basic law of physics: what goes up must come down. The sobering fact is this: There is little that most people can do to predict with accuracy when prices will decline, how much they will decline, and when they will bounce back. Prolonged periods of price decline are alled “Bear Markets,” and over the years investors have endured quite a few.
Despite the disturbing fluctuations, the stock market has continued to go up over the long run. But during market cycles of 3 to 5 years, and often longer, volatility can wreak havoc on an investor’s need for reliable growth or income. For no matter how high the market is today, experience tells us that tomorrow could be another story.
Bear Markets of the 20th Century Dow Jones Industrials
| Market Top | Market Low | Decline |
| 6/17/1901 | 11/9/1903 | -41% |
| 1/19/1906 | 11/15/1907 | -48.50% |
| 11/19/1909 | 9/25/1911 | -27.40% |
| 9/30/1912 | 7/30/1914 | -24.10% |
| 11/21/1916 | 12/19/1917 | -40.10% |
| 11/3/1919 | 8/24/1921 | 46.60% |
| 3/20/1923 | 10/27/1923 | -18.60% |
| 9/3/1929 | 11/13/1929 | -47.90% |
| 4/17/1930 | 7/8/1932 | -86.00% |
| 9/7/1932 | 2/27/1933 | -37.20% |
| 2/5/1934 | 7/26/1934 | -22.80% |
| 3/10/1937 | 3/31/1938 | -49.10% |
| 11/12/1938 | 4/8/1939 | -23.30% |
| 9/12/1939 | 4/28/1942 | -40.40% |
| 5/29/1946 | 5/17/1947 | -23.20% |
| 6/15/1948 | 6/13/1949 | -16.30% |
| 4/6/1956 | 10/22/1957 | -19.40% |
| 1/5/1960 | 10/25/1960 | -17.40% |
| 12/13/1961 | 6/26/1962 | -27.10% |
| 2/9/1966 | 10/7/1966 | -25.20% |
| 12/3/1968 | 5/26/1970 | -35.90% |
| 4/28/1971 | 11/23/1971 | -16.10% |
| 1/11/1973 | 12/6/1974 | -45.10% |
| 9/21/1976 | 2/28/1978 | -26.90% |
| 9/8/1978 | 4/21/1980 | -16.40% |
| 4/27/1981 | 8/12/1982 | -24.10% |
| 11/29/1983 | 2/24/1984 | -15.60% |
| 8/25/1987 | 10/19/1987 | -36.10% |
| 7/16/1990 | 10/11/1990 | -21.20% |
| 7/20/98 | 10/08/98 | -18.97% |
Bear Markets of the 21th Century Dow Jones Industrials
| Market Top | Market Low | Decline |
| 5/21/2001 | 10/09/2002 | -40.83% |
Peace of Mind
To achieve peace of mind, plus greater rewards, just put yourself in the right position.
There are many types of investors, with many kinds of investment goals. And just about every investor understands that to seek higher than average returns means accepting a higher than average amount of risk.
For a significant number of investors, however, putting their capital
at risk is unacceptable. So in order to protect their capital they
turn to “safe,” or low-risk
instruments such as Treasury bills, Government bonds, and even CDs,
accepting as a consequence the low returns associated with such investments.
These investors, seeking to minimize their risk, put themselves in
the ”Less Risk, Less Return” category.
Other investors, seeking higher returns and with a higher tolerance for risk, invest in securities they hope will yield high returns over a period of time. They are nonetheless very uncomfortable with the amount of risk they are taking and worry about what will happen to their capital should the market go into a rapid decline. Given a choice, they would really rather not be in the ‘More Risk, More Return” category.
The answer for both of these investors is to move into another quadrant. Call it “Less Risk, More Return.” Yes, it does exist, and the way to get there is to accept an investment methodology known as Alternative Investments, which Sage Capital Advisors has vast experience.
Our Specialty
- Reduce Investment Volatility
- Gain Higher Returns with Lower Risk
- Preserve Capital During Market Declines
If you could accomplish those goals, you would certainly gain peace of mind, and end up with enhanced performance as well.
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Services Commission. The information and opinions contained in this document
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