How To Lose 46%

One newsletter reader, who wants to remain anonymous, called a couple of days ago and told me that his wife’s portfolio just lost some 46% dropping from $170k to some $91k in about 1-1/2 years.

Your first reaction might be “how could you let this happen,” but I believe that this is, unfortunately, not an isolated case. Whenever investors engage the services of a broker or an advisor, there is some trust involved by assuming that this person knows what he’s doing.

As the portfolio starts to sink into oblivion, you’ll hear explanations like “it’ll come back up,” “a turn around is about to happen,” or my all time favorite “the market can’t go any lower.” There are a host of other excuses, but you get the picture.

This investor’s portfolio was diversified, which means it was set up based on a buy and hold mentality, irregardless of whether market conditions were bullish or bearish at that moment.

The reader was kind enough to share one main component of his portfolio, which was a fund called RHY. Let’s take a look at a 2-year chart:

This is about as bad of a chart you can find if you’re holding a long position. The reader told me that he got in at $16 and finally out at about $1.30 due to his urging and not his brokers. It’s another sad story of total incompetence and lack of a plan to protect a client’s assets.

This illustrates what I have been writing about for years. When you select someone to manage your portfolio for you, the most important question to ask is “what is your exit strategy?”

If there is no clear answer or stammering and a bunch of excuses as to why he doesn’t use one, look for someone else. Once you find such a person, get it in writing by asking for an Investment Policy Statement (IPS), which should exactly describe the methodology employed to get in and out of the market.

No matter which investment approach you favor, losses are part of investing; keeping them small and manageable is the key to long-term investment success.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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