This year has been really tough for stocks & cryptos. My office colleague told me that he lost 75% of his invested money in cryptos. And one of my contractor’s engineers got whitewashed his entire account. So many such scary stories are ripe on the internet which are in fact true, undoubtedly.

Ambitious, passionate & highly optimistic, I was kicked off to earn hefty amount this year. I was imagining how to use part of doubled wealth - what to buy, how much to reinvest, and blah blah blah. But the field is always tougher than ever expected - sometimes outrightly opposite of what you plan.

As soon as the market took a downturn, I began losing money. All the stocks were in red, and some of them more than -20%. But fortunately, I didn't allow this continue. I was conscious and determined that I am not going to lose. I wasn’t new to the market and was prepared to face this downturn - so I immediately resorted to what I knew about risk management in stocks.

One mind boggling fact popping into my mind all the time was the table I read in the book written by Mark Minervini – a stock wizard who is known to be a champion of U.S investing.

Courtesy: Book – Trade Like a Stock Market Wizard by Mark Minervini

How true! You need a gain of 100% to recover a loss of 50%. And 100% gain in a year can only be achieved by those who are potential millionaires. All the experienced & wise traders would advise you that saving your money is far more important than earning it - in the both stock & crypto market. When you cut your losses, gains come automatically.

When you start losing, frustration and anxiety cripple your ability to keep your discipline intact.

I use Etoro and there I follow some of the best traders whose gains in the previous years (i.e. 2020 & 2021) were ranging from 30 to 50%. I constantly watched their portfolio and compared mine with theirs to know their strategy, choice of stocks & cryptos, and profits. Initially, I was under the perception that they must be experts in handling risks but I was surprised to know that they weren’t so good.

For the purpose of research, I prepared a table to analyze their losses.

Note: I haven’t shared real names. Their experience is of more than 10 years in stocks.

You can see that all of them have losses above 20% in 6 months. These losses are not so high but still they are considerable. Compared to them, my losses were 17% for the same period. And in fact, my losses were only 5% if consider my total allocated amount for the stocks. (I kept more than 70% of my allocation in reserve foreseeing the market crash).

Why my losses were less? How did I manage risk?

Last month, I carefully analyzed my risk management strategy. I tried to identify the exact points that I am sharing with you below.

1) Keeping Track of the Market

The first thing I did was keep track of the market. Somewhere in November 2021, news start coming about the possible crash of the stock market. Oil was around 80 dollars a barrel and it was expected to keep on rising. The prices of all commodities were rising which in turn swelled the inflation figure above 5% in U.S. News was coming about Fed interest rate hike in the coming quarters.

Apart from fundamentals, technical were showing that the market had reached an extremely high level where profit taking by big institutes and investors was imminent. Most of the tech stocks had reached astonishingly higher prices whereas their fundamentals were not justifying their price levels. The growth of the tech sector which was the leading market had slowed down. Growth is the ultimate fuel that runs the engine of stocks. No matter how good a company is, if its growth slows down, wise traders get rid of such stocks.

Keeping track of the market helped me clearly understand where the market could go, enabling me to take precise steps to avoid losing money.

2) Keeping Reserves

The foremost step that I took consequently was to postpone depositing an additional big sum of my savings that I was planning to invest. An idea could be to keep all amounts in a broker account & hold them until the market is favorable. However, when you have money in a broker account, any slight temporary upside in the market or very strong recommendation of broker websites or companies like Fool, Seeking Alpha, Zacks, etc. which regularly keep popping up on your mobile (many traders like me subscribe them) can entice you to throw all amount at once in the stocks. Remember! When a market is takes reverse gear, 90% of the stocks come down and some of them can crash more than 70%. Hence, there is a very low probability of earning any money during a bear market, so it is better to keep your money in reserve rather than trying and failing.

3) Investing only 25% of My Total Balance

The second thing I did was that I only invested 25% of my total balance and made it the representative whole of my total performance. A regular trader cannot stop trading because trading becomes his habit and seeing stocks moving up rushes dopamine in the body which lures him to press the buy button. That’s why, why not trade with less money when it’s obvious you are going to lose – history tells this, and experience obviously.

4) Keeping losses to 10%

Initially (when the stock market began losing its momentum) I hold some cryptos & stocks despite losing more than 20% percent in them hoping that they will recover. By holding them, I lost almost 10% of my balance in a month. But then for later months, my average losses were curtailed to 1% a month. Even when I was investing only 25% of the total balance, I didn’t allow any stock or crypto to lose more than 10%.

There is no end when a stock fails. Asana went from 140 dollars to 18 dollars, Upstart from 390 dollars to 22 dollars, and so on and so forth. When a stock enters a downtrend, more specifically in stage 3 (decline stage), holding it can wipe out your investment. Once I bought Jasmy coin for 20 dollars for sake of testing, and I was left with hardly 1 dollar. Some people suggest that we should buy low but that’s not true. When a car moves forward, it keeps moving unless some opposing force acts upon it or it gradually loses its momentum. The same happens when it moves backward. So when a stock moves lower there is a higher probability that it will keep moving low. (Here I am not talking about temporary pause or market correction which is generally referred to as pull back).

5) Differentiate between Market Correction & Poor Fundamental Performance

One thing I have learned is that a stock can either drop due to market correction or its poor fundamental performance. It’s highly important to know what is causing the price drop.

You can understand this difference by understanding the difference between the fall of Bitcoin and Luna coin. Bitcoin plunged from 65000 to 18000 due to market correction, but Luna plummeted from 119 dollars to 0.000045 dollars due to flaws in its fundamentals.

You can hold a stock that retraces due to market correction e.g. Microsoft or Amazon, but you should never hold a stock that comes down due to slowed growth, higher debts, or other evident financial/strategic reasons. This understanding kept me away from Cloudflare, Upstart, Asana, Roku, etc. These weren’t bad stocks but they were trading at extremely high P/E while their growth couldn’t sustain their drastic price movement.

6) Switching to Commodity-Based Cyclical Stocks

I didn’t apply this strategy, but I observed that many wise traders did it successfully. When the downfall of the stock market is due to inflation which is based on commodity prices, the best strategy is to switch to basic materials stocks like oil, coal, gas, steel, etc. Such may be referred to as value stocks.

I was astonished when I saw a trader making consistent profits every month during the market crash. When I analyzed his portfolio, I found that he had amassed most of the oil, coal, and gas-based stocks.
But again, these stocks grow for a short period of time, and it's better to switch to growth stocks as soon the market gets better.

Losing money in stocks is highly painful. We should be prepared for managing the risks instead of always eyeing burgeoning profits. Watching some good YouTube videos of guys who analyze the market and reading some news can help to understand where the market is heading. But ultimately, our real focus shouldn’t be on the market but stocks.