This is another BIG one. One of the most common question asked. And it is a million dollar question isn’t it.
Problem is, there is NO ANSWER. As an advisor, you are doomed if you answer this with a strong opinion.
The reason we think there is NO answer to this question is that it is impossible to predict the direction of the market in short term, and this handicap is bestowed upon ALL of us. Only the intelligent are aware of it.
If you say/feel that market is ripe for correction and advise accordingly, the ensuing rally will happen without your client participating in it.
If you say/feel that market will Rally Big and advise accordingly, the ensuing bear market crash will create a big dent in your client’s portfolio.
So whats the answer, are we going to get away with this by giving this diplomatic gyaan!!
Answer is in EXPECTATION SETTINGS. Efficacy of a strategy/Product needs to be calculated on 03 factors
1 rolling returns basis
2 Rolling drawdown basis.
3. Max Drawdown in crash basis.
Which is to say, how much can I expect to earn in a 3 year period. and how i much under water can i expect to go in a 3 year period and whats the worse that has happened.
So anytime a client askes me if he should double down and increase his allocation to MWM, my answer is simple. I urge them to look at our performance graph.
Any forthcoming year can be a 2011 or a 2018 where we struggled. Any future year might have 2008 or worse fate where we had a 30% drawdown.
and similarly any future year can have a 2017 or 2020–21 kind of secular bull run.
Which one will come first is anybody’s guess and a futile academic exercise. Best of industry stalwarts have fallen flat on their face coming on TV and removing doubts about their (lack of) intelligence.
Point is, it doesn’t matter. play the LONG game. Be prepared to have a 2008 like crash any time. Be prepared to have a chop fest of 2011 and 2018. In that preparedness, you will entitle yourself to ride good years.
Your overall CAGR (compounded annual growth rate) is a function of falling lesser and rising higher than the benchmarks. That is the game. Find a product which does that in accordance with your pain threshold.