Years ago, I ran track and later in the military I also had to run. They required you to run two miles in a certain time to make the cut.Now, you may not believe me with my beautiful dad body of today, but there’s one lesson I never forgot: successful distance running is all about steady pacing.At the start of a race, you’d see these young bucks sprint to the front, eager to lead the pack. But before long, they’d run out of steam. Their breathing got out of sync, they lost rhythm, and they struggled to finish.
That’s exactly how most investors treat their portfolios, chasing every uptick, burning energy in the sprints, and collapsing when the downturns hit.
Example
I once had a client come from another advisor who said, “I feel like my account is strapped to the market rollercoaster. When the market goes up, I go up. When it crashes, I crash. I don’t feel like I have any control.”
That helplessness is what happens when a portfolio is built for speed, not endurance.
The Problem: Losses Hurt More Than Gains Help
- A 20% loss requires a 25% gain just to break even.
- Soon-to-be retirees with poorly constructed portfolios may not have time for the recovery.
- Research shows that losses have twice the psychological impact of gains.
In 2000 and before I was investing, my own father was on the verge of retirement. That dot-com bubble bursting had him working more years so he could retire. Similarly, 2008 and again in 2022, investors who were fully exposed to the market saw their plans delayed or derailed. They sprinted with the market, and crashed with it.
Why Protecting Downside Matters
Downside protection is about building endurance, not chasing bursts of speed:
- Sequence-of-returns risk: Early losses in retirement can permanently derail your plan.
- Peace of mind: A steady portfolio helps you sleep at night.
- Compounding math: Avoiding big losses keeps growth moving forward.
It’s like running at a sustainable pace — you might not look like the sprinter up front, but you’ll finish strong.
The Smarter Alternative: Research-Driven SMA Portfolios
Protecting your downside doesn’t mean hiding from growth. It means being intentional:
- SMA portfolios eliminate hyper-diversification. Fewer, well-researched companies provide clarity and reduce overlap.
- Research-driven focus reduces volatility. Managers with conviction know their companies deeply and can pick those less sensitive to market chaos.
- SMA ownership gives you a rudder and a sail. Without it, a portfolio can feel like a ship adrift in a storm, at the mercy of every market headline.
Many companies are inherently less at risk during downturns, owning them intentionally, instead of chasing the whole market, helps portfolios stay upright when the seas get rough.
In Summary
Just like distance running, investing is about pacing yourself. Sprint portfolios burn out in downturns. Endurance portfolios — research-driven, concentrated, intentional — stay steady and win the long race.Protecting your downside isn’t about avoiding risk. It’s about avoiding collapse.
Let’s run a downside risk analysis to see how your portfolio holds up in storms. If your account feels like a rollercoaster, let’s add intentional downside protection.
References
- Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk.
- Morningstar Research: Downside Capture Ratios in Mutual Funds.
- Cohen, R. B., Polk, C., & Silli, B. (2010). Best Ideas. Review of Financial Studies.