The FSA Safety Net® Part 2

How does the FSA Safety Net® work? Ron Rough, FSA’s Director of Investment Management continues our discussion about the FSA Safety Net® and how FSA uses this tool to help protect our clients from sustained downward trends.

The FSA Safety Net® Part 2 Transcript

Hello this is Ron rough with a technical Tuesday video.

Today we’re going to talk about the FSA Safety Net®.  The FSA Safety Net® is an exit point that we assign to each security in a client portfolio. What we’re trying to accomplish here is during these severe bear markets that may take prices down 30, 40, even 50 percent, we want the portfolios to be well protected during those environments. And during these smaller declines, let the portfolios participate as much as possible.

how the fsa safety net® works in your portfolio

Now let’s look at this from a portfolio standpoint. Let’s assume that we are 95 percent invested. And that stocks fall five percent and you’re in an all equity portfolio. In that situation, it’s very likely the FSA portfolio will fall five percent right along with the with the stock market.

But then, during the next five percent drop, as we’ve been getting some safety nets trip and beginning to build up cash. In the next five percent drop, the FSA portfolio might only fall three or four percent.

Then in the next five percent drop, because our cash is built up as much as it has, at this point, we might only fall one or two percent.

And then finally, another five percent drop in the stock market, and our portfolios might only follow one percent. We may not fall very much at all. After this point, we’re a hundred percent in money market. And if the market continued to fall into a full-fledged bear market, we wouldn’t fall it all.

The fsa safety net® works like brakes on a car

One analogy I like to use when talking about how the safety net impacts the portfolio. Is to think about a car breaking down the highway.

Now imagine that you’re driving down the highway, and you’re going full speed and you see trouble up ahead. What’s the first thing you do? You take your foot off the gas.

The second thing you do is you start to put your foot on the brakes and you come to a stop. But you don’t come to a stop immediately. It takes time for the car to get to a stop. The safety nets operate the same way.

As each fund is tripping through its net on its own, the cash is building up in the portfolio, and eventually the portfolio comes to a stop by being a hundred percent in cash.

when the fsa safety net® doesn’t work

If there’s an unexpected shock to the system to the markets and like a flash crash, where the market falls sharply in one day, the safety nets aren’t designed to protect against that. Because we need a market that goes down over time.

And we have some disclosures at the end to talk a little bit more about that if you’re interested.

And if you have any questions or comments on this video, please call or email us. And until the next update, thank you for watching!

FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is available at or by calling 301-949-7300.

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