Risk Management

 

AAM’s Solution to Investor Fear

We have developed an investment strategy to address the dynamic of investor fear of the market. By focusing on risk management, we aim to reduce portfolio volatility, thereby reduce the seemingly never ending stress of exposing hard earned assets to the market's wild swings. See Strategy.

 

 

Assessment of the Fear Dynamic

 

  • Investors need a game plan for dealing with the severity of market volatility.

 

  • Recent history of downside volatility (S&P500)
    • 2007-2009 bear market:                               -57.7%
    • 2010 Flash Crash + Summer Weakness:         -17.1 %
    • 2011 Greek/Euro Crisis:                               -21.6%

 

  • Sustaining a major percentage loss requires an even larger return to breakeven. We aim to avoid as much of that loss upfront as is reasonably possible.
    • A 30% loss requires a 43% return to breakeven
    • A 40% loss requires a 67% return
    • A 50% loss requires a 100% return

 

  • Studies show that people hate losing $1 vs. winning $1 by a factor of 2.7x. When in the midst of losing money, some people naturally envision the worst case scenario and panic. Successful investing is best achieved through preparation and objective, unemotional decision making.

 

  • While bonds and mattresses may offer a degree of solace, equity investing has the potential for greatest returns; however, the fear of experiencing another catastrophic bear market or even a severe correction is severely dampening enthusiasm for this asset class.

 



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