When you consider how a 50% decline requires a 100% rally to break even, and a 70% decline requires a 233% rally to break even, you can see why defending against dramatic portfolio declines is important. As it turns out, the actual S&P 500 decline is 57% from the October 9, 2007 high of 1,565 to the March 9, 2009 low of 676 (including dividends the decline is 55%). The recovery as of last Friday’s closing price of 1,004 is 48.5%, or 50% including dividends. Even though the decline was 55% and the recovery has been 50%, the index still needs to rally an additional 56% just to get back to the October 2007 highs!
What would happen if an investor only captured 50% of the market decline and then captured 50% of the latest rally? Once again the numbers might be counterintuitive to some. An investor with a portfolio valued at $1,565 would have seen their portfolio value decline by 27.5% (one half of the 55% decline) to a value of $1,134. Then the portfolio would have rallied by 25% (one half of the S&P rally of 50%) to a value of $1,417. The portfolio would only be 10% below its starting value, as opposed to the current S&P dilemma of needing a 56% rally to get back to even. As it turns out, Pinnacle’s Moderate Growth portfolios have a similar ratio of downside and upside capture. Our Appreciation portfolios have done even better with the downside capture being contained but the upside capture being much higher as a percentage of the market. As we work through the entire cycle, defending against large losses has served our clients well.
