Barbell strategy and Drawdowns

asset allocation, Drawdowns, Barbell, Uncle Point.

Lets define the term drawdown before we figure out ways to bring it down.

Drawdown is the reason why you leave the markets. Its the pain that your portfolio’s equity curve faces from recent high to now. It is “THAT FACTOR” that is responsible for the behavior Gap.

Wait what is a behavior gap.

A performance gap between a AMC/advisors' performance and the actual end result that the client got.

If the drawdown is bigger than your pain threshold, you will throw in the towel which will lead to a behavior gap.

Since our launch in April 2017, MWM achieved a CAGR of 28.70% with max DD of 28%. (including transaction costs, not including dividends).

Markets in the same time period fell a lot harder than our max DD. During corona, Nifty had a DD of -34% and smallcap index was decimated. So by virtue of falling less(er) we relatively outperformed the markets.

BUT… How does that help you if your pain threshold was lesser than our 28% draw down. It is like fighting with Ali with a guarantee that he will punch you with ONLY half his power.

Problem is, you will still have a broken Jaw in the end..

So, Its important to know your pain threshold or as ED Seykota says, “THE UNCLE POINT”

REMEMBER, Drawdown is the cost of doing business, you cannot do away with it, but you can bring it down to your sleeping limit.

There was an interesting joke that happened when someone asked ED SEYKOTA in a seminar, “how to eradicate drawdowns, to which he said, “STOP TRADING!!!. Simple”.

One of the ways to lower the drawdown is to do what is called Equity Curve trading. As the name suggests, you go in and out of the markets based on the performance of your equity curve, call it a trend following system deployed on the performance graph itself. We will not talk about this way today as its for the full time traders only and involves effort and churn.

The second way is the asset allocation. Lets have a look at MWM performance with various amount of debt allocation (assuming 5% return on debt funds)

21% CAGR is still a decent return and the drawdown has come down to a mere 18%. Lets get REALLY CONSERVATIVE and prepare a portfolio for someone very risk averse. Lets do a 50/50 portfolio between debt and MWM.

The drawdown is at 11.5% which is manageable but Now you must be wondering this 16% CAGR is not good enough and won’t make you rich any time soon.

I will leave you pondering with this thought with the final graph.

This is BARBELL in practice. Instead of buying the market like NIFTY (earn 10–14% CAGR with crazy drawdowns), it is much better to buy a safe treasury with half your capital and deploy the other half for riskier factor investing.

Comments are welcome.