Ask most investors what “risk” means and they’ll point to volatility — specifically, standard deviation, the familiar statistical measure of how much a portfolio’s returns fluctuate around their average. For decades, standard deviation has been the default language of investment risk. It appears in fund fact sheets, academic papers, and advisor presentations. It is the backbone of modern portfolio theory. And it is, in important ways, an incomplete picture.

Standard deviation treats upside and downside fluctuations as equally “risky.” A month in which your portfolio gains 8% is counted the same as a month in which it loses 8% in the eyes of standard deviation. But no investor calls their advisor when returns are too high. When returns surprise to the downside, however, it is another story. The asymmetry of lived market experience and how real people experience financial loss is what ultimately matters. Risk is directional, but a volatility metric like standard deviation does not recognize this fact.

More fundamentally, standard deviation assumes that investment returns follow a normal, bell-shaped distribution. They do not. Equity markets exhibit “fat tails” — extreme events that occur far more often and are of a greater magnitude than what a normal distribution would predict. The crashes of 2000–2002, 2008–2009, and 2020 are examples that were outside what most models predicted ahead of time. These “flukes of statistics” turn out to be recurring features of the financial landscape, and any risk framework that fails to account for them is working from an incomplete map.

The main point is that standard deviation counts good surprises and bad ones equally — but people experience them very differently. A measure of risk that ignores this asymmetry is measuring the wrong thing.

The Psychology Of Loss: Why Pain Matters

Behavioral finance has documented something investors have known intuitively for a long time: the pain of a financial loss is roughly twice as powerful as the pleasure of an equivalent gain. This is not irrational. It reflects how human beings actually experience uncertainty and regret.

What this means in practice is that risk is not symmetric in its emotional consequences. Not only does a 50% drawdown require more than a 50% recovery to break even — it also inflicts real psychological damage along the way. People who experience steep losses are more likely to sell at the worst moment, permanently impairing their outcomes. The sequence of returns matters enormously, especially for those who are drawing income from their portfolios.

Given this reality, a risk measure that captures the actual experience of loss is far more relevant to real investors than one that treats all return variation as equivalent.

A Better Lens: The Return-To-Drawdown Ratio

Drawdown captures something standard deviation can’t: the actual experience of loss. It measures investor pain more accurately than standard deviation — and such pain determines whether we as humans are able to stay the course or abandon a strategy at precisely the wrong moment (See Dalbar study here).

At Washington Crossing Advisors, we think about drawdown risk through a simple but powerful lens: the Return-to-Drawdown ratio, or R/D. It is calculated as:

Return-to-Drawdown (R/D)  =  Annualized Return  ÷  Maximum Drawdown

A higher R/D ratio means more return is being earned for each unit of maximum drawdown endured. It rewards strategies that generate solid returns without exposing investors to ruinous declines. It captures the roller-coaster risk that smoother statistical measures hide.

When we apply this measure across a range of popular strategies and benchmarks, quality focused strategies like the WCA Rising Dividend strategy stand out with a relatively high return per unit of maximum drawdown of any index in our comparison (Table, below). We don’t think this is an accident. It is the direct result of building a portfolio around high-quality companies with consistent and growing dividends: businesses that are durable, flexible, and predictable. While these companies may lack excitement in good times (rapid growth, exciting story) this lack of excitement is more than made up for in difficult times. It is also interesting to note that the Dow Jones Select Dividend Index, which represents the most widely traded of the market’s highest-yielding stocks, ranks low with regard to return-to-drawdown and performs least like the WCA Rising Dividend Custom Benchmark.

Where Markets Stand Today: Little Margin For Error

The case for defense is especially urgent today.

According to the Census Bureau, there are a record 100+ million Americans that are either transitioning into retirement (ages 62-70), in active retirement (ages 70-80), or in late retirement (ages 80+)*. And drawdown risk for those heading from their peak accumulation years (ages 50-62) into these retirement stages is potentially the most financially damaging and behaviorally dangerous. As a society, we have never before had so many people at such an advanced age confronted by a market so little concerned about risk.

U.S. equity markets have recently set a new record: the total value of publicly traded American stocks now stands at approximately $75 trillion — roughly 240% of GDP (Chart, below). This ratio, often called the Buffett Indicator after Warren Buffett’s description of it as “probably the best single measure of where valuations stand at any given moment,” is at the highest level in recorded history. For context, the ratio peaked near 140% before the dot-com crash and sat around 105% before the 2008 financial crisis. It should also be noted that this figure accounts for only the value of public equity value and ignores the value of private equity.

Consider the current landscape. Investors appear to have already looked past the ongoing conflict with Iran and its implications for global oil prices and supply chains. Credit markets remain calm, but calm credit markets have a history of turning sharply and often without warning. And while artificial intelligence has captured enormous investor enthusiasm — and attracted enormous capital — not every AI investment will generate the returns being anticipated and the impact AI has on employment trends is already starting to be felt. The gap between expectation and outcome, when it arrives, could be large and swift.

None of these risks are predictions. Markets can remain elevated for longer than skeptics expect. But a public equity market priced at 240% of GDP is a market with a thin margin of safety. It is a market in which the cost of being wrong is likely high, and the benefit of having a defensive plan is correspondingly greater. We offer quality and rising dividends as an answer to the defense question.

A Special Word For Investors Nearing Or In Retirement

For investors in the accumulation phase — those with decades of contributions ahead of them — a significant drawdown is painful but recoverable. Time is on your side. A 30% decline, given sufficient runway, can be absorbed and overcome.

But for investors who are nearing retirement or already drawing income from their portfolios, the calculus is fundamentally different. A large drawdown at the wrong moment — just as withdrawals begin — can permanently impair the sustainability of a portfolio. In 2000-2002 the Nasdaq fell over 80% and many investors’ retirement plans were suddenly and without warning upended. This is the sequence-of-returns risk that financial planners rightly emphasize, and it cannot be diversified away with time alone.

In these cases, defense is a necessity. The WCA Rising Dividend strategy was built with this defense in mind. By focusing on quality companies with growing dividends, we aim to deliver a portfolio that earns competitive returns over a full market cycle while genuinely addressing the downside. The Return-to-Drawdown data in the table above speaks directly to that objective.

The Bottom Line

Risk is not just volatility. It is the depth of loss, the psychological cost of watching a portfolio decline, and the behavioral mistakes that often follow. Risk measures like standard deviation, for all its intended mathematical elegance, does not capture these things.

Actual drawdown does. And in a market priced at record valuations, with real geopolitical and economic risks present, the investors best positioned for whatever comes next are those who have a genuine plan for the risk side of the investment equation.

Defense, as they say in sports, wins championships. In investing, it may well determine retirement security. A quality-focused portfolio of companies that tend to regularly increase dividends is one way to address both the offense and defense side of the game.

*https://www.census.gov/library/stories/2025/12/older-workers.html

Additional Index Descriptions:

WCA Quality Indices are based on Washington Crossing Advisors’ quantitative analysis of firms along three dimensions: asset profitability, consistency, and leverage. Higher quality companies are defined as those which fall in the top quintile of largest-cap U.S. companies and tend to have higher average profitability, greater than normal consistency, and low leverage. Lower quality companies are defined as those which fall in the lowest quintile based on the same criteria. Indices are reconstituted annually, continuously rebalanced, and presented on a total return basis, as calculated by Bloomberg. Indices are unmanaged and do not represent performance of any actual portfolio or portfolio strategy offered by Washington Crossing Advisors, LLC.

Dow Jones U.S. 1000 Index

A member of the Dow Jones Total Stock Market Indices family, designed to measure the performance of large-cap U.S. equity securities. It is float-adjusted and market-capitalization weighted.

Dow Jones U.S. 1000 Equal Weight Index

The same universe of large-cap U.S. stocks as the Dow Jones U.S. 1000, but with each constituent assigned an equal weight, removing the size bias inherent in capitalization-weighted construction.

Bloomberg U.S. Large Cap Value Index

Designed to measure the performance of large-cap U.S. equity securities that are classified as “value” based on a multi-factor analysis. Value characteristics typically include low price-to-earnings, price-to-book, and price-to-sales ratios.

Invesco Low Volatility Index (S&P 500 Low Volatility)

Consists of the 100 securities from the S&P 500 with the lowest realized volatility over the prior 12 months. The fund and index are rebalanced and reconstituted quarterly. Lower-volatility stocks receive higher weights.

Vanguard U.S. Quality Index

An actively managed, rules-based strategy that evaluates U.S. companies of all sizes for high-quality characteristics, using screens designed to ensure diversification and mitigate exposure to lower-quality names. Quality is assessed through profitability, cash flow generation, and balance sheet strength.

Invesco High Quality Index (S&P 500 Quality)

Tracks the performance of the 100 stocks in the S&P 500 with the highest quality score, calculated based on three fundamental measures: return on equity, accruals ratio, and financial leverage ratio.

iShares Quality Index (MSCI USA Sector Neutral Quality)

Tracks an index composed of U.S. stocks with high return on equity, stable earnings, and low debt, offering a way to invest in financially sound companies across large- and mid-capitalization segments.

iShares Select Dividend Index (Dow Jones U.S. Select Dividend)

Composed of 100 of the highest dividend-yielding securities in the Dow Jones U.S. Index (excluding REITs). To qualify, each security must have a dividend per share at least equal to its five-year average, have paid dividends in each of the prior five years, and maintain non-negative trailing earnings per share.

S&P 500 Dividend Aristocrats Index

Measures the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.

S&P High Beta Total Return Index is designed to measure the performance of the constituents of the S&P 500 that are most sensitive to changes in market returns. S&P Low Beta Total Return Index is designed to measure the performance of the constituents of the S&P 500 that are least sensitive to changes in market returns.