How To Avoid Self-Inflicted Losses In A Down Market

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If you're checking, chasing, and stock-picking, you may increase the odds of self-inflicted losses when the market is down.

For single stocks, drawdowns like this aren’t uncommon. According to JP Morgan, between 1980 - 2020, roughly 45% of stocks that were ever in the Russell 3000 fell 70% or more from a prior peak and never recovered. Almost a coin toss.

So if you aren't planning to make a change, what’s the point of looking? If there's a reason to trade, make sure recency bias isn't influencing the decision.It can be tempting to make changes to your portfolio after recent events. Looking at various equity indices for company size and factors, there's little correlation between the best or worst performers in the past month or year versus longer periods of time. In fact, recently, the outcome is reversed.

If you sell an investment for a loss, you can't buy the position back for 30 days. So you'll either buy something you don't like as much or stay in cash. The market may move significantly during this time - four indices above have gains over 10% in a month.

 

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