Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... It's not how much you win when you're right that matters most; it's how much you lose when you're wrong.
This inviolable truth is built into the asymmetric math of compound growth.
A 25% loss requires a 33% gain to return to breakeven, but a 33% loss requires a 50% gain and a 50% loss requires a whopping 100% gain... just to return to even.
Notice the asymmetric math?!? The gap between the two numbers grows geometrically.
Worse yet, this breakeven analysis is before you include the headwinds of expenses, taxes, inflation, and the volatility effects on compound growth (the subject of a future newsletter).
Translating that math into actionable words, it means investment risk management is the key to maximizing portfolio compound growth and safe withdrawal rates in retirement. Consistency matters... a lot.
The less you lose during periods of adversity, the less you have to make during the good times to win the game.
This isn't Todd's opinion. It's a math truth fully supported by investment research.
And it's intuitive, common sense once you understand it.
Name the recent champions in your favorite team sport. They're rarely the top offensive or top defensive team in the league.
Instead, they achieve champion status by consistently performing in the top 10-20% for both offense and defense. You need both to win consistently.
The offense has to be good enough to reliably put points on the board. You can't win without scoring.
But the defense is the key. The defense limits the opposing team's offense which means your team's offense has more time with the ball to score and fewer points required to win. The defense changes the entire balance of the game.
The same is true with your investment portfolio.
The better your defensive strategy, the easier it is for your offense to win the game for you.
What almost nobody figures out about trend-following investment strategy is that it's simply adding a defensive overlay to your existing offensive investment strategy.
By limiting losses using pure mathematics, trend following... - avoids the life-changing losses that can derail your wealth plan.
- puts the asymmetric math of compound growth to work for you.
- means your offensive strategy doesn't have to score as many points to win.
- improves the consistency of your returns through diverse and changing economic regimes (epochal change).
- dramatically increases the safe withdrawal rate from your portfolio so your wealth goals are easier to achieve.
- and so much more...
Even though this is an inviolable math truth that is intuitively obvious when understood, it's rarely taught in financial circles because conventional financial advice employs passive investing, which requires you to blindly accept market risk to earn a market return (aka - buy and hold, passive asset allocation).
History shows that accepting market risk (instead of applying mathematically disciplined risk management) means your portfolio will incur losses of 50% or greater at some point in your investment career. It's not a question of "if", but "when." And those losses violate the asymmetric math of compound growth.
Since epochal change began (announced to my private Expectancy Wealth Planning community right at the final bond market high in mid- 2020, and announced in this newsletter in the fourth quarter 2021) bonds have already lost 50% and stocks remain at nosebleed valuations. We're merely waiting for a normal mean reversion in stock valuations to produce losses in the 50% (or greater) range for a conventional 60/40 portfolio. It's simple arithmetic.
The problem is losses of this magnitude, although rare, violate the mathematics of compound returns as shown above. You only need to do it once to screw up a lifetime of compound growth.
When you add real world assumptions including expenses, inflation, and the volatility tax on returns to the market losses, the problem is serious. Way more serious than most investors understand.
And it's all because of one thing - unmanaged market risk. It's a failure of investment risk management.
Conventional financial advice' primary risk management tool is asset diversification, which is necessary, but not sufficient. It requires non-correlation to add value, but during big, bad, bear markets all assets rise in correlation toward one. In other words, diversification works to manage risk the 95% of the time that you don't need it, and fails the 5% of the time that you desperately need it to work.
There's only one solution. You must manage market risk (the exact opposite of what conventional financial advice advocates). It's the single largest remaining risk in a properly diversified portfolio.
Again, this is not Todd's opinion. It's an inviolable math truth proven through research.
if you don't manage market risk, then history shows it's only a question of time until a life-changing loss strikes your portfolio.
I've provided you with a do-it-yourself investment risk management solution here. I started recommending it three years ago and customers have been very happy with their results.
If you're still not using trend following to manage risk, then today's newsletter provides resources showing you how this solution adds value to your investing. It's not too late to start.
The new investment epoch began at the end of 2021. What worked before will not be optimum for the future.
You need the right investment skills for this new environment.
I hope today's resources help...
Deep diversification means diversifying by strategy; whereas, conventional diversification only diversifies by asset. Diversifying by strategy is critical to risk management because the noncorrelation is more stable during big, bad bear markets. Given that bond/stock correlations are rising, you need deep diversification. This research shows the time-varying nature of optimal trend-following allocations and why now is the right time to start given epochal change. Trend-following's convexity means the tracking error is greatest when you need it most, which is why it's such a powerful deep-diversification strategy. Click here to learn about my recommended done-for-you trend following software solution using the same portfolio construction strategy you use today (you're just adding a risk management overlay!) This paper shows how trend-following is ideal for managing risk in unpredictable and divergent macro environments (exactly what we face today). It produces "heads you win" - "tails you win" results because it's agile enough to adapt to changing regimes (epochal change). The beauty is trend following never predicts the future and doesn't try to "market time." Instead, it uses math to manage risk and harness asymmetric compounding by converting unpredictably into statistically valid outcomes. It's an essential diversifier in today's investment environment, and this is my recommended solution. I share this video showing the basics of trend following because almost nobody understands the simplicity and power of how it works reliably to manage risk. I'm not advocating the oversimplified model used in the video, and I apologize in advance for the ridiculous ads and related videos that YouTube will show you. If you can get past the YouTube nonsense, there are some gems inside this video for someone learning trend following. At 6:02 it will show you the primary payoff - avoiding large losses - that makes all the noise that preceded worthwhile. Again, I share this video with reservation because my recommended trend following risk management solution is vastly superior in so many ways to what this teaches, but the basic truth of avoiding large losses being the key remains true. It works because it manages risk with mathematical certainty - no market forecast required. And improved risk management changes everything. Get started today before the next big market decline starts.
Onward and upward!
Todd Tresidder
 Take Action Now So You Can Grow Your Wealth During Epochal Change: -
This investment software solution includes two of Todd's top investment systems. You'll learn the smart, proven way to manage portfolio risk during epochal change. Once you understand it, you'll wonder why you tolerated the unmanaged risk in your old "buy and hold" investment strategy. -
My Expectancy Wealth Planning group coaching program shows you how to maximize the expected growth of your wealth in every market condition regardless of epochal change. My students were prospering during the good times, and they're still prospering during this adversity. Join this smart community of active wealth builders to secure your financial future.
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