Downside Capture
Definition
Downside Capture measures how much an investment falls relative to a benchmark during periods when that benchmark is declining. It is expressed as a percentage. A downside capture below 100% means the investment loses less than the benchmark during market downturns, which is typically a positive trait.
Why It Matters to Investors
- Helps quantify how well a strategy protects capital in bear markets
- Critical for evaluating risk-adjusted performance
- A low downside capture is often more important than high upside capture
- Can reduce drawdowns and support long-term compounding
- Useful for comparing defensive strategies or funds
The TiltFolio View
Both TiltFolio systems place a strong emphasis on downside capture. TiltFolio Adaptive is built to avoid large losses, with downside capture around 21% relative to the S&P 500. That means when the S&P 500 declines, TiltFolio Adaptive tends to fall much less, or even rise. TiltFolio Balanced also achieves strong downside capture through its diversified allocation across asset classes with different economic sensitivities.
This low downside capture is a key source of both systems' outperformance. While upside capture may be modest relative to the S&P 500, the ability to sidestep major drawdowns allows returns to compound more efficiently over time.
In our view, avoiding big losses matters more than chasing every gain. Downside protection is the foundation of long-term investing success.
Real-World Application
• A strategy with 50% downside capture loses half as much as the market in a correction
• An index fund has a downside capture near 100%, meaning it mirrors the market's losses
• TiltFolio's system captures about 21% of S&P 500 losses, reducing portfolio risk
• Low downside capture helps investors stay invested during volatility