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7 Million Reasons To Protect The Downside
BY CHRIS DEMASI - 13/06/2018 | VIEW MORE ARTICLES BY THE MONTGOMERY TEAM

We talk a lot about downside protection at Montgomery Global. Intuitively it seems like a very good thing. Who on earth ever wanted their money to take nose-dive? (Answer: nobody). But the idea of reducing downside risk immediately raises some questions, like: what’s the value of protecting the downside? Or, what do I have to give up to insure against the downside? And of course, how do I go about putting downside protection in place?

Today we will address the first of these three questions and look at the value of protecting the downside in equity market investing.

To do this let’s assume a very savvy investor, call him Frank, had invested a million dollars into global equities at the beginning of 1997. This would have been a smart move. Over the next 20 years to the end of 2017 , he would have turned his initial investment into almost $4 million. His experience is shown in the chart below. Well done Frank!

The last 20 years of global equity returns and (hypothetical) investor return for $1 million investment in the global equities index

Screen Shot 2018-06-12 at 2.55.53 pm

Source: MGIM

Now imagine Frank has a friend, call her Vanessa, who is even savvier again.

Vanessa found a way to invest in global equity markets starting in 1997 whereby she experiences all of the gains in the years that the market has a positive result, but when the market turns down she manages to avoid any losses. In other words, Vanessa has the same experience as Frank, but for these 6 years: 2000, 2001, 2002, 2008 and 2015 (the last of these two years is almost the same result for both investors given the very slight negative performance in each). What do you think Vanessa’s investment account would be after 20 years?

Well it turns out that Vanessa would have turned her initial investment into a whopping $11 million (actually a little more). Just by avoiding the down years (and only really 4 in particular), Vanessa has made well over $7 million more than her (and our) good friend Frank.

The last 20 years of global equity returns and (hypothetical) investor return for $1 million investment in the global equities index excluding negative years)

Screen Shot 2018-06-12 at 2.56.52 pm

Source: MGIM

Next week we will explore the idea of downside protection in equity investing further. But for now we can see it’s incredible value. To Vanessa it’s worth at least $7 million!



View More Articles By The Montgomery Team

Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com.

Roger's step-by-step guide to valuing the best stocks and buying them for less than they're worth, Value.able, is available exclusively at rogermontgomery.com. Skaffold is an online stock-picking application that rates ASX-listed stocks from A1 to C5. Watch a demo of Skaffold at www.skaffold.com.



 

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