While investment selection and diversification are important, many investors suffered losses of 30% or more in 2008 with “well diversified” portfolios. Markets recovered from these losses, but many investors sold their stocks before the recovery. We all have a pain level where we can't take any more losses, so we sell. Then, even when the markets start to bounce back, we miss the recovery since we did not get back in.
At L Squared Wealth Management, we believe the best way to get ahead in the market is to minimize the inevitable losses. Losses are more painful to your financial health than gains are beneficial. A 50% loss requires a 100% gain to break-even. On the other hand, if we can limit losses, it is easier to get back to even. For example, a 15% loss only requires a 18% gain to break-even.