I recently read somewhere about how “portfolios in the stock market spend between 50% and 90% of their lifespan in drawdown – ie. below their all-time high equity peak.”
For those who may not be familiar, this is where an ‘equity peak’ is achieved when the portfolio reaches a new all-time high in total portfolio value (including cash), and ‘drawdown’ is defined as the period in which the portfolio value is less than all-time high equity peak.
So out of interest I opted to take a fresh look at the SWS public Portfolio 1 (unhedged).
(Note: You can get yourself a clear graphical representation of the SPA3 Portfolio 1 equity curve from within your TradeMaster by selecting <Portfolio/Chart…> and then working from the bottom up, progressively select and delete all charts other than the very top {blue} one.)
And this is what was found.
In the 7 years from 2001 through to 2007 inclusive, the Portfolio spent 85% of the time in drawdown and 15% of the time making new equity highs. In this 7-year span, the longest drawdown period was 376 (calendar) days – from 5/06/02 to 16/06/03. There were also two other 300+ day drawdown periods.
In the 9.6 years from 2001 through to July 2010 inclusive, the Portfolio will have spent 89% of the time in drawdown. The Portfolio made its last new equity high on 1 Nov. ’07, and for 1,003 days since has been in drawdown. (Hmmm – that’s 166.8 per cent more than the previous longest drawdown period. Is that a Fibo number? Must tell Brent Penfold.)
It does of course, bring another ‘markets theory’ to mind, and that is the one of ‘reversion to the mean’. If you don’t happen to have any aversion for reversion then obviously things are looking pretty bright for the medium term future . . . . . . . notwithstanding ‘anything can happen’ – and in both directions, . . . (albeit not simultaneously).
By the bye, I do highly recommend you getting your hands on Brent Penfold’s recently released “The Universal Principles of Successful Trading”. It’s a keeper – and definitely one worthy of more than just the one read.
Cheers - Dave
