$1,000,000 became $432,200.
Pick a kind of market
Large losses can happen anywhere, at any time
The U.S. has had a good century. Most stock markets have lived through a loss deep enough to take a decade or more to recover from, and some never did. Even a portfolio spread equally across countries fell 66% in the Great Depression.
Worst drawdowns in equity excess returns, in U.S. dollar terms. Years to recover are measured from the start of the drawdown; "+" means not yet recovered as of 2019. Source: Bridgewater Associates, 2019.
Losses and gains are not symmetric
Three questions every hedge answers
No hedge is free, and none is perfect. Using the 5% protective puts from the chart above, here is how each question plays out over 1990 to today.
Impact
How bad do things have to get before the hedge kicks in?
Cost
How expensive is the hedge, and how much does that cost vary over time?
Reliability
How certain am I that this hedge will work when I need it?
Framework: QVR Advisors and Newfound Research.