Market Downturn? What's Your Price for Protection?

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By Joseph Hosler

With markets hitting new highs and headlines warning of doom from all corners of the world, investors are rightfully worried about the severity of the next downturn.

And the fear is justified given that the largest drawdowns have also been the most recent.

The severe downturns experienced over the past two decades have also hit almost all asset classes with the same level of force. 

The old standby of diversifying to protect one’s assets has lost some of its legitimacy as a result of the increasing correlations and rapid declines in prices that many investors have experienced.  Additionally, the more severe the downturn, the longer it takes for the market to recover to its pre-downturn levels.  These experiences have created flightiness within the markets and an increasing desire to find a comforting solution to protect against the next rout.


However, the experience of late has been anything other than comforting.  It is completely understandable to fear the next great downturn, but too often that fear can lead to further wealth destruction in client portfolios. Clients fail to fully participate in rising markets, preventing a recovery of assets lost in the last downturn.  This may not be as apparent as an absolute loss, which may lead people to keep their statements closed, but the impacts can be much more destructive.  The worst outcome is for a client to invest in ‘protection’ strategies, only to find that the protection offered comes with little ability to recoup losses, leaving a client ill prepared for retirement.

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