Blog | CB Investment Management

Higher Long Term Return With Lower Risk

Behaviour Traps. Systematic Solutions.

ARKK ETF investor behaviour demonstrates that many investors today need “Best Investor” guidance.

High Risk only works when inflation and growth are accelerating

High long term returns come from low risk strategies

Drawdowns are disasters for your net wealth
Keith McCullough

If you don’t have a systematic approach to your investing then it is important to realize that, with GDP growth now declining, big drawdowns in account value are more frequent and they can destroy your wealth. Systematic Investing is designed to turn that around.

The chart below shows that the ARKK ETF has fallen from around 156 all the way down to 59, which is back to its pre covid level in February 2020. That is a zero return for 2 years following a 62% drawdown. Remarkably, looking at the share count, there has still been almost no net selling of the fund.


Apparently a substantial body of the investment community are fine with investments that have 62% drawdowns, which require a 163% return just to get back to the highs, and even then this does not account for the lost time without compounding.

Let’s be clear. This kind of investing is, at best, gambling. These investors have very little chance of long term compounding of their wealth. Most likely this is a behavioral trap of overconfidence and poor risk management following years of a spectacular bull market.

The S&P 500 appears to have been a one way market for around the last 40 years, assuming you have managed to ride out some severe drawdowns. But even then that was very suboptimal.

This has been a uniquely US experience, and a massive outperformance relative to earnings. Nothing like what happened in either Europe or Japan over a similar period. Nevertheless, for perhaps two generations of US investors this experience is hardwired into what they have come to expect. While this is wonderful for investors who have participated so far, it leaves them dangerously unprepared looking forward in what are likely to be very different circumstances.

The outlook looks far more challenging:

  1. Valuations are still at nosebleed levels, and suggest dismal expected returns for many asset classes as shown in previous insights.
  2. Record 40 year inflation, which is historically inconsistent with high valuations.
  3. Central Banks face challenges in raising interest rates sufficiently high to contain inflation. See our recent notes on R-star, growth, central bank insolvency, and debt.

Systemic Solutions

There are some great solutions and some asset classes still have potential. Money always has to flow somewhere.

Checklist and/or System…

Successful investors understand that there are flaws and limits to their own discretionary decisions. So, at a minimum, an effective checklist and/or system is an invaluable component of an optimal investment process.


Better still you can become increasingly systematic by adopting great software that is now widely available. You will find this takes away much of the strain of discretionary decision making. You will even find you make more money by taking less risk! This is the great secret of the “Best Investors”. There are multiple examples of this in my book, and this is just the beginning of what can improve your investment experience.

More Money with less risk? Another example from Stansberry Research:

Since 1995, the S&P 500’s Sharpe ratio has been 0.71. That’s our benchmark. Now, let’s say you invested in the most volatile stocks. Suppose you ranked the stocks in the S&P 500 by volatility and divided them into five equal buckets (or “quintiles”) of 100 stocks. You picked the most volatile quintile each month and held those 100 stocks in equal weights.

The beta of your portfolio would have averaged 1.49, which means it had a systematic risk about 50% higher than that of the market. (The S&P 500 has a beta of 1.) And as is typical when investing in volatile stocks, the drawdowns were severe. Your worst monthly return would have been a 29% decline in March 2020 during the COVID-19 crash. In fact, you’d have suffered through four 20%-plus monthly declines.

However, you wouldn’t have been compensated for the increased volatility. In the end, you’d have had a total return of just 1,160%. That’s more than 300% less than the return for the S&P 500. And the Sharpe ratio would have been an abysmal 0.42.

Now, let’s say you had invested in the least volatile stocks. Suppose you picked the 100 least volatile stocks (bottom quintile) in the S&P 500 each month and held them in equal weights. The volatility of this portfolio would have been much lower than that of the market, with a beta of just 0.66.

The big surprise is that this low-volatility portfolio had a nearly 1,900% total return, outperforming the market by about 400%. And its Sharpe ratio was a superior 0.76.

Lower risk… higher returns. These results fly in the face of the economic theory in textbooks.

However, not in my book. The main reason is that dynamic compound interest works much better with low volatility. The next time anyone tells you to take more risk for a higher return, surprise them with your superior knowledge.

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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