This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

3 Reasons Bulls Take on Too Much Risk

Aggressive investors or those with long-term time horizons can oftentimes handle that kind of volatility and are suited to make up the losses through time or trading strategies. However, those who are in retirement or don't have the stomach for large price fluctuations should be mindful of the downside risk.

By my count, SPY has now been above its 200-day moving average for 15 consecutive months. Everyone is a bull when the markets are rising for long periods of time and the gains come easy. However, your resilience will be tested when volatility returns with a vengeance.

3. Big Losses Are Difficult to Recover From

In investing there are four certain outcomes: (1) a big gain, (2) a small gain, (3) a small loss and (4) a big loss. Three of these outcomes are acceptable. Everyone can agree that a big or small gain is going to move the needle forward on your portfolio and even a small loss won't derail you from reaching your goals. However, the big loss is the one cardinal sin that will haunt your dreams and hinder your performance.

The worst part about a big loss is how much harder it is to recover from. Remember that based on the rules of compounding, a 25% loss requires a 33% gain to get back to break even. A 50% loss requires a 100% gain to get back to break even. If you hang on to an investment with a loss of more than 25% and it continues to underperform, that money is just dead. It is not contributing to the long-term success of your portfolio and acts like a boat anchor attached to your money.

If 2008 taught us anything, it's that there is no such thing as a safe stock and that big losses are difficult to recover from. That is why I always employ a stop loss or sell discipline on my invested positions to guard against the potential for a protracted decline. It's not a perfect system, but it allows me to sleep well at night knowing that I have a limited amount of downside exposure.

The Bottom Line

Bulls often have it easier than bears because despite every correction, recession or depression the stock market has been resilient enough to march its way higher. Not every investment survives these cycles, but the system as a whole has been one that creates wealth for the majority of its participants.

I don't align myself with either the bull or bear camp exclusively. Instead, I focus on building balanced strategies that take into account both sides of the trade and consider both the upside potential and downside risks. That way I am prepared for either outcome and can shape the holdings in my portfolio to align with the current market environment.

The drawback to this philosophy is that I lose out on some upside in raging bull markets, but by the same token I do not undertake the same perils during bear markets either. I try to keep some cash on hand to take advantage of strategic opportunities when they present themselves. This allows me the flexibility to add to holdings that I feel are represent a unique value or reduce exposure to investments that hit my upside targets.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $111.01 3.10%
FB $88.85 1.90%
GOOG $607.15 1.60%
TSLA $244.73 2.60%
YHOO $31.69 0.28%

Markets

Chart of I:DJI
DOW 16,226.98 +168.63 1.05%
S&P 500 1,934.49 +20.64 1.08%
NASDAQ 4,706.7760 +70.6710 1.52%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs