Over the past year, out Conservative allocation had a return of 7.90%; our Balanced allocation had a return of 17.70%. While these are very healthy returns, it is important to remember that return is not the only measure of performance. Another important performance measure, which we take into account as part of our investment methodology, is risk. One common measure of realized risk is called maximum drawdown (MDD). MDD is the largest drop in equity, measured as a percent. Low MDD implies low risk. MDD for both of our allocations over the past year was just 4.01%.

The fact that the “buy and hold” approach to investing can be very dangerous has recently been brought back to public consciousness. MDD for the C Fund, which tracks the famous S&P 500 stock index, has reached 55.22% earlier this year! MDD’s for the other two stock funds within the TSP are even higher — 57.43% for the S Fund (“Extended Market”) and 60.89% for the I Fund (“Europe Pacific”). Despite the media reporting a recovery, as I am writing this, the three stock funds are still down about 25% to 30% off of their peaks. In my opinion, such huge drawdowns are not acceptable.

It is always important to have a solid investment strategy, especially in risky times like these. I believe that we have such a strategy. Ours is a scientific approach developed by a Ph.D. statistician. We consider not just the return but the risk as well. Our method adjusts to changing market conditions, is fully automated, and tells you exactly what to do. If you find our newsletter helpful, please help us spread the word by telling your friends and coworkers about it. Also, write about us on various blogs and online forums.

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