The Power of Downside Protection

When it comes to growing your capital, you might assume that participating in stock market rallies is the most important factor. But avoiding market downturns can make an even bigger difference in your portfolio’s bottom line.

For example, the S&P 500’s 10 worst days over the 20-year period from 1994 to 2014 had a far greater effect on returns than the 10 best days. As the illustration below clearly shows, an investor who avoided the 10 sharpest drops would have more than doubled their returns in comparison to the index. In contrast, an investor who missed the 10 best daily rallies would have experienced less than half of the overall index growth.

This graph is for demonstration purposes only. It is not meant to demonstrate whether L&S was positioned in S&P 500 stocks or cash/cash equivalents on any of the noted dates.

This graph is for demonstration purposes only. It is not meant to demonstrate whether L&S was positioned in S&P 500 stocks or cash/cash equivalents on any of the noted dates. (See important disclosures regarding performance).


The outsize impact of market downturns is one reason L&S Advisors places such importance on downside protection. Minimizing losses is critical because the road to recovery is longer and steeper than the road to loss.

Because you have less money working for you after a loss, your portfolio must generate higher returns than before just to return to the break-even point. And as you can see from the interactive chart below, as the loss percentage increases, the percentage needed to break even grows at an exponential rate.


Investment Returns Required to Break Even After a Loss

Losses Incurred Gains to Recover
  • 1000%
  • 900%
  • 800%
  • 700%
  • 600%
  • 500%
  • 400%
  • 300%
  • 200%
  • 100%
  • 0
  • -100%
100% 100% chart
Move slider to see how much gain you need to recover from a loss.

Returns are asymmetric. If an investor sustains a 50% loss of capital, it takes a 100% return on the remaining capital just to return to the break-even point.

chart

L&S Advisors strives to minimize downside loss by keeping a close watch on the macroeconomic, cyclical, political, and demographic forces and trends that define the investment environment. The goal is to avoid significant drawdowns so we can focus on building wealth when market conditions improve, rather than playing catch up with your capital.