How to Navigate Explosions in the Market

This essay was originally published in DailyWealth Trader, a daily trading advisory. To learn more about this service, click here.


Netflix lost $54 billion in market cap last Wednesday.

The stock fell 35% in a day. It was down Thursday and Friday as well.

There's no question that the company's recent announcement caught investors off guard. Roughly 200,000 Netflix subscribers left in the first quarter of 2022.

Even worse, Netflix expects another 2 million subscribers will drop off in the second quarter.

Now, a 35% drawdown is enough to take a chunk out of anyone's portfolio. And if you were holding shares of Netflix before the announcement, you are feeling the pain right now. But it doesn't have to be that way.

Today, I'll show you how you can be on board for potential gains in companies like Netflix... but survive massive drops when they happen.

Let me explain...

Netflix has been one of the "big five" for years. It has been in the "FAANG" group since 2015 when the term first came around.

I'm talking about Meta Platforms (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL). They are some of the most important and largest companies on the planet.

It's easy to see why these stocks are successful. Facebook is the largest social media platform in the world. We all likely own an Apple product... or know someone who does. We shop at Amazon, watch Netflix shows, and use Google to search the web.

These companies also have a history of big gains... soaring hundreds, if not thousands, of percent over the past decade. And investors fall in love with them as a result.

This is where investors slip up. They see these companies and their performance and think nothing can go wrong. Then, they go "all in" with their own money, assuming that the good times will continue.

If you take that approach, big losses can pile up in no time. Netflix is a great reminder of that. Look at how poorly it has done recently...

Netflix is down 60% over the last year. And it's off 71% from its most recent high. If you put all of your eggs in Netflix's basket, your portfolio is in the abyss.

There is a way to have your cake and eat it, too, though. You can be on board for the chance for big gains, but you don't have to expose yourself to crippling losses.

It all comes down to position sizing.

Position sizing is deciding how much money to put into a given investment. It's one of the most important considerations for any investor. In fact, it's much more important than any stock you pick. Here's why...

Let's say you had a $100,000 portfolio and you were extremely bullish on Netflix.

If you put that $100,000 into Netflix on November 17, 2021, you would have lost $71,150. That's more than two-thirds of your portfolio in six months.

But instead of carelessly putting all of your portfolio into Netflix, say you had focused on position sizing...

You put 2% of that $100,000 into Netflix because you were bullish. That meant you had only $2,000 at risk in the stock.

Sure, your gains wouldn't be as big if the stock had moved in your favor. But you also wouldn't have risked taking a catastrophic loss when bad headlines wrecked the stock.

Instead of being down 71% on your entire portfolio since its November peak, you'd be down just 1.4%. That's a much better scenario!

Now, we'd hope that few investors are the type to put their entire portfolio into a single stock. But it's still easy to get blindsided by taking more risk than you planned to.

The important part is finding the position size that works for you... and sticking with it.

It's one of the best ways to avoid taking catastrophic losses in the market. And if you don't put it to work, your career in the market won't last long.

Good investing,

Chris Igou

Further Reading

"It's easy to get too greedy," Dr. David "Doc" Eifrig writes. It's only natural for folks to chase a huge payoff and put too much capital into one asset. But by using this strategy, we can earn sizeable returns while minimizing our risk... Learn more here: The Dose of Reality Investors Need Right Now.

"The greatest investors in the world already know this secret," Porter Stansberry says. If you want to maximize your returns in today's unpredictable market, you need to understand this simple tool... Get the full story here: The 'Best, Safest, and Surest' Way to Build Your Portfolio.

Market Notes
HIGHS AND LOWS

NEW HIGHS OF NOTE LAST WEEK

Suncor Energy (SU)… oil and gas
Black Stone Minerals (BSM)… natural gas
Waste Management (WM)… trash and recycling

NEW LOWS OF NOTE LAST WEEK

JPMorgan Chase (JPM)… financial giant
Bank of America (BAC)… financial giant
Taiwan Semiconductor Manufacturing (TSM)… semiconductors
General Electric (GE)… manufacturing giant
Boeing (BA)… “offense” contractor
Verizon Communications (VZ)… telecom
Netflix (NFLX)… streaming
Disney (DIS)… entertainment
Starbucks (SBUX)… coffee “World Dominator”
Chewy (CHWY)… pet products
Wayfair (W)… home goods
PayPal (PYPL)… mobile payments
Match Group (MTCH)… online dating
Pinterest (PINS)… image-board sharing
Zillow (Z)… online real estate