16. Why You Shouldn’t Fear Volatility Flashcards
(17 cards)
What did Fred Smith do with Federal Express’s last $5,000?
He gambled it playing blackjack in Las Vegas and won $27,000
This was a risky decision driven by the need for immediate funds for jet fuel.
What lesson does Smith’s story illustrate about risk?
Sometimes the biggest risk you can take is taking no risk at all.
What is the average maximum intrayear drawdown for the S&P 500 since 1950?
13.7%
What is the median drawdown for the S&P 500 since 1950?
10.6%
What is the Avoid Drawdowns strategy?
Invests all money in bonds in years with stock drawdowns of 5% or greater and moves to stocks in all other years.
How much less money would an investor have if they followed the Avoid Drawdowns strategy from 1950 to 2018 compared to Buy & Hold?
90% less money.
What is the recommended drawdown threshold to maximize long-term wealth?
15% and above.
What does investing in bonds during years with a 15% or greater drawdown achieve?
Outperforming Buy and Hold by over 10x from 1950 to 2020.
What is the ‘Goldilocks zone’ of drawdown avoidance?
Avoiding drawdowns of 15% or greater.
What is the relationship between intrayear drawdowns and annual returns?
There is a negative relationship; larger drawdowns generally correlate with worse performance by year end.
What is one of the best ways to combat volatility as an investor?
Diversifying the assets owned and when they are owned.
Who is quoted regarding the acceptance of market price declines?
Charlie Munger.
True or False: Avoiding all drawdowns is the best strategy for long-term wealth creation.
False.
Fill in the blank: The price of admission for long-term investment success includes accepting _______.
volatility and periodic declines.
What does the analysis imply about intrayear declines for equity investors?
Some level of intrayear decline (0%-15%) should be accepted, while declines above 15% should be avoided.
What happens if an investor avoids drawdowns of 20% or more?
They can miss significant market growth opportunities.
What does the term ‘price of admission’ refer to in investing?
The acceptance of volatility in exchange for potential wealth building.
