On Risk Management: March’s Market Crash and Your Portfolios

28 April 2020

In a span of just 4 weeks, the compounded impact of COVID-19 and the oil shock caused the S&P 500 to decline by 34.5%. For context about how dramatic that drop really was, consider that the S&P 500 took 6 entire months to lose 46% from the day Lehman Brothers filed for bankruptcy in 2007. 

Though major market crashes like this are rare and extreme, we designed our investment framework to focus on risk management so that each portfolio can withstand extreme drawdowns, then recover faster when the markets eventually rebound. 

As designed, our portfolios’ drawdowns stayed incredibly close to their respective SRI boundaries in MYR terms even through one of the most unexpected and quickest market crashes in history. We achieve and deliver this precision by making data-driven asset allocation decisions based on stress tests against the most damaging financial crises in history. This preparedness empowers you to make informed decisions about your investments, and we hope instils confidence in the intelligence and reliability of our investment framework.

Table 1: Portfolio Performance in MYR term

Note: Total returns before fees measured from 17 Oct 2019 to 17 April 2020. Source: StashAway, Bloomberg

Why it’s important to select the right SRI level

Most fund managers will showcase their returns without clearly articulating how much risk their clients’ investments are exposed to. In selecting your portfolios’ SRI, you are in control of how much downside you’re willing to accept with your investments in any given year. 

More specifically, our portfolios are qualified by the SRI, which indicates the maximum percent loss you could experience in a year with 99% confidence. For instance, if you chose to invest at a 14% SRI, there’s a 99% probability that you won’t lose more than 14% of your investment in a given year. If you’ve budgeted for a 30% drawdown by selecting a 30% SRI and your portfolio experiences a drawdown of 26.3% during the COVID-19 market crash, for example, this drawdown is near your accepted risk exposure. 

Managing risk is crucial to successful long-term investing. Over a longer time horizon, riskier investments do, on average, have higher returns than less-risky investments because markets go up over the long term. But, achieving these returns comes with more short-term volatility that not all investors are comfortable enduring. Knowing how much you’re comfortable losing in the short-term empowers you to stick with your investments so that you can capitalise on the upside when markets do eventually go up. 

While we manage your portfolios to make sure that your investments stay close to your selected risk levels, it’s key that you also take steps to ensure you’re emotionally prepared to weather the ups and downs of the markets. If you’re unable to stomach the extreme volatility right now, revisit your risk levels to make sure they’re aligned with your risk tolerance. Our range of SRI levels gives you the flexibility to cater your investments to your risk appetite, timeline and investment needs so that you can comfortably stay invested for the long term.

Editor’s note: This article was originally published on 16 April 2020, and has been updated for accuracy. In the original version, our calculations indicated that all portfolios remained within their SRI levels. However, there was a calculation error made when translating USD returns to MYR in Table 1 and not all portfolios remained within their SRI levels. As such, we’ve amended the article and Table 1 to reflect the updated peak-to-bottom calculation.