Investment Philosophy


Winning by not losing.


Our philosophy is simple. Capital preservation is our primary focus, and risk management is the key to making money. By focusing on capital preservation, portfolio fluctuations should become less volatile and may recover more quickly during market rebounds.

 

Conventional wisdom says it is best to stay fully invested and ignore the ups and downs of the market. However, over the course of the last decade, we believe many investment advisors have failed to protect their client's wealth because of this buy-and-hold philosophy. This buy-and-hold mentality is based on the belief that in the long run, financial markets produce an adequate rate of return despite periods of large declines and high volatility. We believe the reason many advisors default to a buy-and-hold philosophy, is because it is a safe route for them. It is our belief that this philosophy is not safe for you.

 

In the chart below (see Exhibit 1), you can cleary see that committing a large portion of your net worth to this buy-and-hold strategy and hoping for the best may be naive. We believe, based on market history, buy-and-hold investing is very risky and leaves you susceptible to massive losses in bear markets. Experiencing massive losses in your portfolio means you will need to generate a much higher percentage gain to break even (see Exhibit 2). Therefore, it is very important to try to protect your portfolio from this type of devastation caused by bear markets.

At Breakwater Asset Management, we believe that strong investment management requires a proactive approach. We feel investment advisors should not only seek to grow but also defend their client's assets against large market losses. By focusing on capital preservation, portfolios can recover more quickly during rebounds and continue to compound gains into the future.

 

Exhibit 1 - S&P 500 

 

 SP-Composite-secular-trends

Source: www.dshort.com

This chart is not intended as a forecast but rather as a way to study the current market in relation to historic market cycles.


 

Exhibit 2 - Importance of Downside Protection

 


Percentage Loss

Percent Needed to Break Even

-20%

25%

-30%

42.9%

-40%

66.7%

-50%

100%

 

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