Rethinking Risk vs. Return

📌 Key Insight:

The relationship between risk and return is not linear. Some of the biggest portfolio improvements come not from adding risk, but from strategically avoiding the worst market days.

📉 Avoiding the Worst Beats Capturing the Best

Conventional wisdom urges investors to stay fully invested to capture the market’s best days. But the numbers tell a different story: missing the worst days often yields better results than capturing the best ones. From 1990 to 2020, if you simply avoided the 10 worst days in the S&P 500, your annualized return would have jumped from 9.3% to 14.7%. By contrast, missing the 10 best days drops the return to just 5.3%.

🔍 The Market’s Skewed Reality

This dynamic exists because the worst days in the market tend to be much worse than the best days are good. In other words, downside volatility has a stronger impact on long-term compounding than upside volatility. Investors consistently underestimate the damage from major drawdowns.

🧠 Rethinking Risk

Rather than blindly accepting more risk in pursuit of higher returns, investors should focus on risk management strategies. Reducing exposure during high-volatility periods—even if it means missing some upside—can result in better overall outcomes. This shifts the narrative from 'more risk = more reward' to 'less downside = more staying power.'

⚙️ Actionable Approach

Using volatility filters, trend-following signals, or risk-adjusted exposure models can help reduce participation during the worst market stretches. Even simply holding cash during clear selloffs can offer significant protection without complex strategies.

🔚 The Takeaway

The best investing outcomes aren’t always about maximizing returns—they’re about minimizing mistakes. Avoiding just a few disastrous days can change the trajectory of a portfolio. Risk is not a toll you must pay to succeed; it’s a force to be managed.