Market Risk Rule #1 – Avoid Large Losses

Average investors are willing to take far too much risk on the downside in hopes that their stock will go back up.  The 2010 market is certainly testing the mettle of even the most experienced investors.  The focus in a down market should be

protection against large losses.

May took back the gains of the strong April rally.  In early June, just when it appeared that buyers had returned, there was enough bad news to stall any rally and the market tumbled further with the S&P 500 losing over 5% for the month.

Experience tells us that it is far easier to find a new opportunity than it is to make up for large losses.  For example, the market has yet to recover from the steep losses in 2008 and early 2009.

To keep our perspective in rough markets, we focus on what we can control and let go of that over which we have no control.  We can control the downside risk.  We don’t think hope forms a successful market strategy.  We draw a line in the sand and identify how much risk we can take and work to protect our accounts.  We also work on our inventory of ideas for the next rally so we are ready to enter positions when the market turns back up.

Price is a leading indicator and the market has dropped below important support levels so caution rules right now.  It doesn’t pay to fight the market.  Once again we have raised cash in accounts and are waiting for evidence that buyers outnumber sellers.  When the market is in a downtrend, we believe we should step aside and wait for the trend to change direction before adding new positions.

Back and forth moves of the market wear investors down and eventually cause them to give up at the lowest point.  Successful investors stay with their plan, monitor the market consistently, follow their rules, and know more opportunities will come.

Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.

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