The Importance of Understanding Downside Deviation in Investments

The Psychology of Health Choices

These stats aren’t secrets, but still, Americans eat garbage and don’t exercise, partially because we are terrible at imagining a future where negative things happen to us. We take our exceptionalism very seriously, from our patriotism all the way down to our mortality.

The Role of Optimism

This positive outlook is also totally essential to keep us motivated and invested. We all believe that tomorrow will be great if today was good, or better times are just around the corner if today was bad. This is a great coping mechanism for the true variability of the world that we can’t control.

Dealing with Uncertainty

We all know everyone hates uncertainty and negative surprises, but this is exactly what the markets will bring, and much of life, for that matter. Sometimes the surprise is not a party. For a great discussion on uncertainty, check out the most recent Standard Deviations podcast with Naomi Win.

Understanding Market Volatility

Putting this in terms of stats that we look at, a high standard deviation implies high volatility and extreme surprises. However, a high standard deviation year to the upside is unexpected but great news. It’s like a sugary snack; we process it quickly and think of it as the market doing what it is supposed to.

The Impact of Downside Deviation

A high standard deviation down year can be crushing, and even if you don’t hear from your clients, the studies we have done with investors and advisors show that they are much more frightened and upset than they let on. This is why standard deviation isn’t a great measure of the volatility in what actually matters to people.

The Importance of Downside Deviation

Downside deviation is the measure that matters. When you are considering any new investment, insist on seeing the downside deviation, as well as Beta, and max drawdown before you take the conversation any further. If you are curious about anything you are using now, hit me up and I will connect you with our team. Take care.

Key Investment Terms

Downside Deviation: Downside deviation is a measure of an investment’s price volatility that focuses on returns that fall below a minimum acceptable return.

Maximum Drawdown: Measures the largest percentage decline from a peak to a trough.

Beta: A measure of systematic risk, or sensitivity of a manager to movements in the benchmark.

About the Author:

Eben Burr is the President of Toews Asset Management and sits on the investment and compliance committees where he helps oversee the culture and direction of the firm. Toews specializes in creating strategies that attempt to limit portfolio losses in declining markets with the client’s financial and emotional wellbeing in mind. Eben is also the President of the Behavioral Investing Institute where he oversees the training of advisors to integrate relational, cognitive, and emotional elements with personal finance to build better plans and stronger bonds. Eben advocates bringing behavioral psychology, introspection, and empathy into portfolio construction, planning, and communication.  Eben lives in Manhattan with his wife, son, and lots of guitars.

DISCLOSURES

Toews Asset Management is an SEC-registered investment adviser with its principal place of business in the State of New Jersey.

This video may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

This video is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice, and no representation is being made as to whether the information provided herein would be beneficial for any investor.

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