Bond Volatility Letter

After back-to-back quarters of down-trending equity markets, investors can see glimmers of hope as the recovery appears to gain strength. The S&P 500 Index closed last week up over 16% from the bottom of the sell-off back in June. The index is still about 10% below the previous all-time high point; the current drawdown in the S&P 500 is still hovering around correction territory.

While the market has recovered over 16% from its bottom, it still needs another 12% to the upside in order to reach its previous all-time high, or a total of 30.8% from the bottom. Compare this figure to the only -23.5% that was lost. This illustrates the math of loss, where the gain required to break even increases as losses are extended.

The Math of Loss

Source: Bloomberg, Redwood. Investor cannot invest directly in index shown. Data as of 8/12/2022.

Portfolio risk management is not simply about helping individual investors withstand the initial -23.5% sell-off, but also the substantial 30.8% gain required just to break even. Your risk-budgeted portfolio is designed to prioritize managing risk and seeks to sidestep drawdowns using tactical mandates. Avoiding the worst of a drawdown can minimize the pain of capital loss and thus require a smaller recovery to break even and help you approach your financial goals.

• We use strategies that incorporate dynamic tactical mandates seeking to reduce drawdown risk.
• The portfolio compositions are rooted in quantitative analysis to adhere to risk thresholds.
• We believe the key to sustainable investment success is the preservation of investor capital.