Mr. Market Gives Buy and Hold a Holiday Present, or, Have You Learned Anything from the Crisis?

Rewind back to February of this year. At the end of February most asset classes were in massive drawdowns referenced in the table below.

The first row is the maximum drawdown each asset class experienced since their respective peaks.

The second row is the appreciation of each asset class since the end of February 2009.

The third row is the amount each asset class is still down from its high.

(Note: The max drawdown may not have occurred in Feb, so the numbers not necessarily sequential ).  Results through 11/2009.

The point of this post is twofold.

1.  It goes to show how risky asset classes are.

2.  It goes to show that ever after this massive rally, as a buy and hold investor, you are still down.  Compounding works both ways!  Down 50%, up 50% does not equal flat.  It equals still down 25%.

2009 should be seen as a big free gift from Mr. Market.  It is a massive rally that is giving you the chance to re-evaluate your risk tolerances.  If you can’t tolerate 60% losses in your portfolio, then you need less equity-like assets.  If you can’t tolerate watching your portfolio decline by half  then you may need to evaluate your risk management systems (you know our solution which is currently hitting new highs).

More in the next post.