Before discussing how I handle sharp market declines it is important to realize how I view them in a broader concept.
The interesting chart below shows every 5% or greater drawdown in the S&P 500 since the start of 2009. The most recent pullback, which is still in effect, marked the 22nd time this has happened.
Every one of the other 21 instances were merely preludes to new all-time records. There is no reason to believe that the current one won't follow that same script.
I've highlighted the very real, and quite scary circumstances that triggered the most serious of those declines. Not only did new records follow, they didn't take long to do so. Waiting periods were measured in months, not years.
Buying shares of healthy, profitable companies after major declines sets you up for huge percentage gains simply by getting back to their recent prices.
Negative media pundits love to tell traders who suffered through 50% losses that they need to see 100% gains just to get even. Those same talking heads rarely if ever suggest that new commitments at half price will give you 100% gains when the old starting level is seen again.
I like to say that, "Nasty selloffs are not price declines, they are value rallies." If you liked a stock at $40, and there has been no negative company-specific news, you should absolutely love it at half price or better.
Here's how I deal with my personal accounts in times of turmoil.
- Triage you portfolio holdings.
- Sell relatively strong, typically conservative stocks and redeploy your cash into lesser quality, but still healthy and profitable names.
Triaging involves going back to basics. Take a fresh look at every stock you hold under current estimates and economic assumptions.
Would you buy it today at its present day quote? If not, consider swapping into something more attractive. If it still appears promising, consider owning more.
The Law of Asymmetric Returns shown above is always in effect. It feels good to see only small losses on utilities or very blue-chip names when the market has crashed. Remember, though, small dips on those type stocks are not where future super rebounds await.
Trading out of small dippers into companies that are ready to rumble once things calm down are where you can turn temporary losses into dramatic gains. March of 2020 was brutal for everyone. Those who followed my advice, though, saw enormous gains later than year and through 2021.
There is no problem with taking realized losses, which can save you on taxes, as long as you don't try to time the market by holding the cash "until things look more stable". The warm fuzzy feeling of sitting on cash as markets fall further dissipates quickly when rip-roaring rallies take place before you got back in.
Paul Price writes each day on Real Money Pro specializing in value stocks and value investing. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Tim Collins, Bret Jensen,, Peter Tchir and others.