A new study shows most stocks have lost value in the last 100 years. Take these 3 steps to protect your portfolio.
Getty Images / Eduardo Munoz Alvarez
- A new study shows 51.6% of US stocks since 1925 lost value over their lifetimes.
- But there are steps one can take to mitigate risk, says Lance Roberts.
- He advises diversification, stop-loss orders, and profit-taking.
It may come as a surprise that most stocks lose value over their lifetimes, given the long-term outperformance of major indexes like the S&P 500.
A recent paper from Arizona State University professor Hendrik Bessembinder found that 51.6% of 29,078 US stocks since 1925 have lost value from when they were listed. The median return of those stocks was -7.4%.
If you're an investor who likes to keep your money in individual stocks instead of an index fund, those might be scary statistics. But there are a few steps you can take to mitigate risk, according to RIA Advisors Chief Investment Strategist Lance Roberts, who discussed the paper in a recent note.
To start — it's advice you hear time and again — make sure your money is diversified enough.
Diversification comes in many forms. In addition to putting money into stocks, perhaps consider investing in bonds and real estate, Roberts said. You could also consider spreading your money across a number of different industries and sectors, instead of having your whole portfolio in, say, a few tech stocks. A simple way of doing that could also be putting money into an index fund.
You can also set up stop-loss orders. This can be done in a brokerage account, and your position is sold if a share price falls to a certain point. There's also the trailing stop-loss order, Roberts said, which adjusts based on upward movements in a stock's price. So a 5% stop-loss limit, for example, moves up to correspond to a level 5% below a stock's rising price, but will never dip below the original stop-loss limit.
"This safeguard ensures that you are not solely reliant on timing the market, which, as we all know, is nearly impossible to do consistently," Roberts said.
And third, take profits on gains. With Nvidia and other AI stocks delivering ungodly returns over the last couple of years, this piece of advice might be good for investors in those firms to hear. It can be tempting to stay fully in a stock that has treated you well. But doing so may also melt away the wealth you've built if the stock has a sudden turnaround, Roberts said.
"This is not an uncommon issue that I always see with clients and prospects," Roberts wrote. "Greed comes in three destructive forms: 1) the need to make more, 2) the lack of knowing when "enough is enough," and 3) the unwillingness to pay taxes."
He suggested a strategy resembling something like taking half of your gains and buying safer assets like Treasurys, and said to keep in mind that paying taxes on capital gains can be cheaper than suffering losses.
"As investors, it's crucial to understand that market gains are never guaranteed and that the risks of overexposure can be devastating," Roberts said. If you're "riding the wave of massive market gains, ask yourself: Is now the time to take some chips off the table? Are your investments aligned with your long-term goals and risk tolerance?"