Global Asset Allocation: Risk and reward isn’t a knob we turn to get what we want. 

I don’t believe I know anyone who invests all of their money in the stock market, all the time.

In order to invest all of your money in the stock market all the time, you’d have to be willing and able to accept a downside loss (drawdown) of -50% or worse. I say that because it’s the historical drawdown.

S&P 500 Stock Index Historical Drawdowns

In the S&P 500 Stock Index Historical Drawdowns chart below, we see -20% several times, -30% a few times, and -45% or more three times. It happens, it can happen, and it will happen again. It’s why I prefer to instead actively manage my risk for drawdown control.

Losses are exponential the deeper they get and too hard to overcome.

To truly understand the risk, I think we have to know if a market has fallen -50% in the past, it could certainly do it again in the future, or even worse. So, the risk isn’t some multiple times a volatility measure like Value at Risk, but instead, the possible loss is at least the worst historical drawdown. Past performance doesn’t guarantee future returns, so it could be worse next time, for all we know.

Since most people probably don’t have the risk tolerance, risk capacity, or financial ability to take that much risk, most investors invest in some fixed allocation of cash, bonds, and stocks. If they use an advisor, they most likely are further diversified into International markets to make it a diversified portfolio of Global Asset Allocation (GAA). To track Global Asset Allocation, I use the S&P Target Risk Indexes for Global Asset Allocation.

The short story is, S&P allocates between equities and fixed income.


How has a Global Asset Allocation performed so far in 2020 through February?

To answer, I look at these S&P Target Risk Index. But, keep in mind, these indexes do not include fees such as advisory fees or trading costs. Clearly, more risk is not always compensated with more return. All of them are down, but the more aggressive allocation to stocks hasn’t resulted in more return, but less, so far.

Global Asset Allocation GAA performance 2020

In fact, the % off high shows the drawdown for each of the Target Risk Indexes. You can probably see why “growth” and “aggressive” isn’t always as it sounds.

Global Asset Allocation GAA Target Risk Drawdown

Risk and reward isn’t a knob we get to turn to get what we want.

I prefer to rotate, rather than allocation, and actively increase and decrease my exposure to the possibility of risk and reward. It’s the only way I know that has the potential for my objective of asymmetric risk-reward.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor in Florida, Tennessee, and Texas. Shell Capital is focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. I observe the charts and graphs to visually see what is going on with price trends and volatility, it is not intended to be used in making any determination as to when to buy or sell any security, or which security to buy or sell. Instead, these are observations of the data as a visual representation of what is going on with the trend and its volatility for situational awareness. I do not necessarily make any buy or sell decisions based on it. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

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