A 33% Drop Requires a 50% Rise to Break Even

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A 33% Drop Requires a 50% Rise to Break Even

The critical importance of recognizing the direction of the general market cannot be ignored, because a 33% loss in a portfolio of stocks requires a 50% gain just to recover to your break-even point. For example, if a $10,000 portfolio is allowed to decline to $6666 (a 33% decline), the portfolio has to rise $3333 (or 50%), just to get you even. Therefore, it is essential to try to preserve as much of the profit you have built up as possible rather than to ride most investments up and down through difficult cycles like many people do.

I generally have not had much problem recognizing and acting upon the early signs of bear markets, such as those in 1962, 1966, 1969, 1973, 1976, and 1981. However, between 1962 and 1981, I twice made the sad mistake of buying back too early. When you make a mistake in the stock market, the only sound thing to do is correct it. Pride doesn't pay.

Most typical bear markets (some aren't typical) tend to have three separate phases, or legs, of decline interrupted by a couple of rallies that last just long enough to convince investors to begin buying. In 1969 and 1974 these phony, drawn out rallies lasted 15 weeks. Many institutional investors love to "bottom fish." They will start buying stocks off the bottom and help make the rally convincing enough to draw you in. You will usually be better off staying on the sidelines in cash and avoiding short-term counterfeit rallies during the first few legs of a bear market.