Introduction
In our first article, we introduced the In and Out long-term investment strategy, along with the InvestIt Now Telegram channel that tracks that portfolio signal.
The In and Out portfolio is either in the In state (100% - SPY) or in the Out state (100% -SHV). We supply the signal as to whether to be In or Out via the @investit_now Telegram Channel
To see and track the states, you can view or join our Telegram Channel, which gives the signals supporting the portfolio.
The first button below allows you to view the channel, whereas the second button allows you to subscribe to this channel and receive updates about the investment signal presented there.
Drawdown - Your personal Fear & Greed Index
Drawdown is a measure of the decline in the value of an investment from its peak to its trough. It is often expressed as a percentage of the peak value. For example, if an investment declines from $100 to $50, the drawdown is 50%.
Drawdown is important because of both how you feel about your investment decreasing in value, and how certain you are of the chances of your investment rebounding over a certain timeframe. It is also a useful measure of how important is for you to have a certain minimum of funds available for life’s events.
Drawdown is an important metric to consider when evaluating an investment, as it can give you an idea of how much risk you are taking on. A large drawdown could mean that you will have to wait a long time to recover your losses, or that you may never fully recover them.
However, it is important to remember that drawdown is not the same as loss. A drawdown simply measures the decline in value from a peak, while a loss measures the actual amount of money you have lost.
For example, if you invest $100 in an ETF and it declines to $50, your drawdown is 50%. However, if you sell the ETF at $50, you have lost $50. If you wait, and the investment rebounds to $100, and then you sell the ETF, you have lost nothing, though, your historical drawdown is still 50%.
It is also important to consider the time horizon of your investment when evaluating drawdown. A short-term investment may experience a large drawdown, but it is likely to recover over time. A long-term investment, on the other hand, may experience a smaller drawdown, but it is also more likely to experience a permanent loss.
The following table shows the drawdowns of some popular ETFs over the past 10 years.
As you can see, these ETFs have all experienced significant drawdowns over the past 10 years. However, they have all recovered and gone on to generate strong returns.
If you are considering investing in an ETF, it is important to understand the risks involved. Drawdown is one of the biggest risks to consider, but it is important to remember that long-term investments are more likely to recover from drawdowns than short-term investments.
Asking ChatGPT: How to Manage Drawdown of an ETF, in general
There are a few things you can do to manage drawdown risk in your long-term ETF investments.
Diversify your portfolio.
One of the best ways to reduce drawdown risk is to diversify your portfolio. This means investing in a variety of different asset classes, such as stocks, bonds, and real estate. By diversifying your portfolio, you can reduce the risk that all of your investments will decline at the same time.
This is why we use SPY as the In leg of our portfolio. It is diversified.Rebalance your portfolio regularly.
Another way to manage drawdown risk is to rebalance your portfolio regularly. This means selling your winners and buying your losers. By rebalancing your portfolio, you can ensure that your investments are properly allocated to different asset classes and that you are not overexposed to any one asset class.
The internal rebalancing of SPY fund take care of this automatically.Use stop-loss orders.
A stop-loss order is a type of order that automatically sells your investment if it reaches a certain price. Stop-loss orders can help you limit your losses if your investment starts to decline.
The Out signal effectively emulates a stop-loss order. If you wish, you could use individual stop-loss orders on the In trades, yet the backtest would then need to be changed, as the strategy is different.Have a long-term investment horizon.
The most important thing you can do to manage drawdown risk is to have a long-term investment horizon. This means that you are not planning to sell your investments in the short term, so you can weather any market downturns.
This is one of the main differences in long-term investments. You need a belief that the market will eventually recover, as it has done in the past.
By following these tips, you can help manage drawdown risk in your long-term ETF investments.
Drawdown Comparison of SPY vs InAndOut
Below is a graph that shows, over the last 5 years a comparison between the InAndOut-Portfolio (blue line) and the SPY-Benchmark (red line).
As in the previous plot, it's evident that the InAndOut-Portfolio experienced less severe drawdowns compared to the SPY-Benchmark, especially around early 2020. This suggests better resilience during periods of market downturn.
Again, the InAndOut-Portfolio shows almost no drawdown towards the end of the period (around the end of 2022), indicating a period of consistent growth.
Conclusions
Drawdown relates to measuring your appetite for risk. It is your own personal “Fear and Greed Index”
The In and Out portfolio, in the past, has reduced the Drawdown compared to the S&P 500 benchmark, while beating the returns of the S&P 500.
Remember, investing involves risk, and past performance is not indicative of future results. Please consult with a financial advisor before making any investment decisions. None of the information we present to you is personal investment advice.
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