One of the biggest risks of investing is that of encountering the inevitable “bear market” during a market cycle. Today’s stock market descended into a ‘bear market’ on June 13th, 2022, when the market index fell by 21% below its previous ‘high’. My SmallTrades portfolio fell by 26% over the same time period [Fig. 1].
Fig.1 bear market
Figure 1 shows a greater loss of market value in the portfolio, compared to its index, due to losses incurred by the portfolio’s holdings. Here’s what happened:
In January, 2022, last year’s broad market ETF [ticker SCHX] and two stocks with disappointing share prices [tickers NVEC and NKLA] were replaced by a growth sector ETF [ticker SCHG] and three established stocks [tickers FB, MKSI, and SMED]. Residual cash was added to several stocks as needed to equalize the distribution of stock investments. Consequently, the distribution of invested principal shifted from 80% ETF-20% stocks to 70% ETF-30% stocks in three months. Figure 2 illustrates the sequential transfer of cash from the ETF to the stocks [Fig. 2].
Fig. 2 reallocation
Meanwhile, a market-wide decline in prices diminished the market value of my portfolio over the entire six-month period [Fig 3].
Fig. 3 impact
All relative values started at 1.00 on December 31st and subsequently changed due to the combined effects of portfolio revision combined with the 6-month onset of the ‘bear market’. Parallel declines of unit values in the stock market (black line), portfolio (red line), and ETF (green line) are consistent with a general downward trend of share prices driven by pessimistic trading in the stock market. A transient surge of my stock values (blue line) reflects infusions of cash into several stock investments during the first 2 months of portfolio revision.
Delistings might add to losses during the ‘bear market’. Suppose two of my stocks with the worst market performance were delisted on June 1st. Estimated losses of -5.1% stock value and -1.6% portfolio value would deepen the June 13th losses described in figure 1. The diversification of my stock investments protects from a steeper loss caused by any delistings. Hopefully my portfolio will remain intact in the near future and recover its growth trend after the “2022 bear market“.
Copyright © 2022 Douglas R. Knight
Small Trades Journal 