Why You Must Play Defense?
Every investor must guard herself against drawdowns, which is the percentage drop in her account after a downward move in the market.
For example, imagine that after a bear market slide, your $20,000 account is reduced to $12,000; that would be a drawdown of 40% (8,000/20,000 = 40%).
If I were to ask some investors, “In order to get back up to $20,000, what percentage return do you need to generate?”
Many would answer, “Since I lost 40%, I have to make back 40%!”
This could not be more wrong!
Notice that after losing 40%, the investor is now starting with a lower base. To undo the $8,000 loss, the return he needs to generate is actually 66.6% (8,000/12,000 = 66.6%)!
The more severe the drawdown, the harder it is to undo the damage, as shown in the numbers below:
| Drawdown % | %Required to get back to break even |
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.8% |
| 40% | 66.6% |
| 50% | 100% |
| 60% | 150% |
| 70% | 233.3% |
| 80% | 400% |
| 90% | 900% |
SimpleVesting includes a defensive strategy called Trend-Recognition to keep you in cash and on the sidelines during extended bear markets.
