Portfolio Risk is primarily an issue of lost time rather than absolute monetary losses. “The market always goes up” is a true adage. But it doesn’t say when.

As far as I know, none of us are vampires, with unlimited investment horizons. As such, the time spent “getting back to even” becomes is a critical issue in risk management. Consider the following optimistic assumptions:

• Recovering after a -15% loss: it takes several good months of performance and up to 2 years to get back to even - needing approximately +18%;

• Recovering after a -30% loss: it takes several good years of performance - needing approximately +43%;

• Recovering after a -50% loss: assuming this happens in a bear market and is not the result of excessive leverage, can take between 3 to 7 years to recover - needing a +100% return.

Note: the time figures presented above are historical averages. Recently, recoveries have been as sharp as drawdowns, with only 5 months needed to fully recover post Covid crash for example. This is a function of elevated valuations, systematic trading, leverage, and Central Bank interference.

Nevertheless, it’s useful to think of risk exposure as potential lost time, in the process. Generally speaking:

• In order to mitigate losing 6-12 months, a short rebalancing interval works best: Daily or Weekly

• In order to mitigate losing 1-2 years, the rebalancing interval that works best should be 2 Weeks and up to 1 Month

• If one can afford losing more than 2 years, then an even longer rebalancing interval can be selected: 1 to 3 Months

Of course, this all ties in with the criteria used for portfolio asset selection. Different rebalancing intervals work with different metrics and filters. But the core concept remains similar and is foundational to master.

Another valid approach is taking different levels of risk with different portions of a portfolio. But that is a more advanced topic that we will cover later.