The Importance of Minimizing Downside Risk in Your Investment Portfolio

John Stanton |

There are two types of risk that go with investing in the publicly traded stock market.   One is called unsystematic risk.   This is the risk that the company,  management,  fail to succeed with their business plan,  poor financial management,  competition produces a better offering,  etc.  

Minimizing this risk requires sound research,  intuition,   


The other type of risk is called systematic risk.   This is the risk that the general market,  and prices,    



Most investors are familiar with the concept of Compounding Interest and how it increases returns over time.  It is one of the simplest but most powerful forces in all of investing.  However, many investors fail to realize the damaging power of “reverse” compounding.  For example, a -20% loss requires a gain of +25% to get back to even.  However, in a more severe bear market like 2000-02 or 2007-09, the S&P 500 can lose -50% or more  – which requires a +100% gain to fully recover!  As losses become more extreme, so does the effect of reverse compounding.