Avoid Self-Inflicted Losses In A Down Market

Stock market declines are an uncomfortable part of investing. Planning ahead of a market downturn is best, no matter what you do during sales are also important. Especially for investors, avoiding total losses is a no-brainer. But sometimes people make decisions that result in avoidable financial losses. Here are three ways to reduce the risk of unnecessary, self-inflicted losses in a bear market.

Single stock ≠ stock market

You’ve heard it before: past performance is not indicative of future results. It’s just not legal – it’s true – and the chart below shows why. this point. After years of hard work…

…Recent public companies and seasoned stocks have experienced spectacular difficulties. Compare those pullbacks to the Russell 3000 and the stock is in shock market not looking but bad.¹

For a single fund, such a draw is not uncommon. According to JP Morgan, between 1980 – 2020, about 45% of stocks in the Russell 3000 fell 70% or more from their previous peak and never recovered. Almost a coin toss.

Make no mistake, investing in a company (perhaps from the user’s choice) can result in huge profits, much more than various indexes. The problem is when investors are not humble about the risks, do not know their emergence, or do not know when to take profit.

Checking your account can do more harm than good

One way investors can take unnecessary losses is by checking their portfolios during market downturns. For example, the chart below plots the one-year total return for the S&P 500. The purple line shows every day profit and loss while reporting the orange line Every month.

The results are the same.

But if you checked your account every day, you have a a lot More ups and downs to deal with. The gyrations in the market will at best pressure you, and at worst, push you to make rash investment choices that can result in losses.

So if you’re not looking to convert, what’s the point of looking? If there is a reason to trade, make sure that innovation bias does not influence the decision.

The market is chasing

It can be tempting to make changes to your portfolio after recent events. Looking at various equity indices for company size and factors, there is little correlation between the best or worst performers in the past month or year versus the period -longer time. In fact, recently, the results have been reversed.

The monthly return on small capital, high-quality shares and security sectors, and the value is quite impressive. However, after seven years out, these indices are the worst performers. Does that mean you shouldn’t have investments with these characteristics in your portfolio? No! Just goes to show how important the distinction is. The market is turning.

If you look at your account every day, it’s tempting to sell the losers and chase the winners. This can have lasting effects. These charts also highlight the lack of tax loss harvesting. Tax losses can have wider implications than the rule of thumb sale.

If you sell an investment for a loss, you cannot buy the position (or a similar one) for 30 days. So you will either buy something you don’t want or be stuck with money. The market can be very volatile during this time – four indices above have gained more than 10% in a month.

This is not an anomaly either. According to Bespoke Investment Group, since 1928, the S&P 500 has gained 15.2% in the first month of a bull market. During the first 3 months the average increased to 31.6%. What the market will do to exit the 2022 bear market is anyone’s guess, but historically, markets move quickly, and the best days in the market often fall within a week. or two of the worst days.

Silver cloth! Market changes can bring opportunities

A change in market conditions may not be all bad news. Rising interest rates are bad news for stocks, bonds and home buyers. But, for people with money, it’s a big win. The one-year Treasury is now yielding 4.75%… versus .17% a year ago (November 2021). That’s a 2,700% increase! Investors can create Treasury ladders or simply buy longer maturities to lock in returns.

Even high-yield savings accounts provide decent returns on capital. There’s no reason to put a lot of money in a 0% checking account and earn no interest when you can earn a guaranteed 3% APY in a convenient savings account.

However, people are not advised to dump their portfolios and buy Treasuries! But for some investors, the results are attractive enough that Treasuries should be part of the conversation when considering new financing.

It also highlights the nuances of investing and why few things are black and white. Don’t check your account every day doesn’t mean don’t check. And a passive buy and hold strategy should not ignore the need for rebalancing, the timing of tax losses, or financial evaluation.

In a down market, there is a tendency for people to want to move. Doing There is something to stop losses. Doing this often (though not always!) becomes an incomplete decision. It is also perhaps the most common way investors manage their personal portfolios against avoidable financial losses.

¹ The total percentage return of the high, Russell 3000 is down about -22% since 11/3/2022. The Russell 3000 represents 97% of the US equity market.


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