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No Rally Can Help These Stocks

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As stocks have moved upward over the past couple of months, many investors have started getting back into the bull-market mindset of trying to figure out how to maximize their returns without regard to risk. But for many investors, the losses they've suffered have been so bad that there's almost no possibility they'll ever earn back what they've lost.

In contrast, playing defense looks stupid during a bull market. But if you pay more attention to protecting your portfolio during tough times than you do worrying about milking every last percentage point out of a bull run, you'll stand a much better chance of turning your savings into significant wealth over the long haul.

It's simple math
At first, that statement seems counterintuitive. After all, how can you make money by sitting on the sidelines? Given how little cash investments like CDs are paying these days, you're not getting much reward for being out of stocks -- and you run the risk of missing a huge rally, exactly like the one we've seen since March.

When you take a closer look, though, you realize that even extraordinarily high returns during a rally don't amount to anything compared to the losses from making mistakes in bear markets. For instance, even though the stocks below have done extremely well since the March lows, they haven't come close to the gains they'd need just to get back to their 2008 levels:

Stock

Return 5/13/08 to 3/9/09

Return Needed to Break Even (Back to 5/13/08 Level)

Actual Return 3/9/09 to 5/12/09

Rio Tinto (NYSE: RTP  )

(80.8%)

419.8%

72.9%

Las Vegas Sands (NYSE: LVS  )

(98%)

4,827%

622.5%

Citigroup (NYSE: C  )

(95.3%)

2,024%

248.6%

Sirius XM Radio (Nasdaq: SIRI  )

(94.7%)

1,787%

166.7%

Hartford Financial (NYSE: HIG  )

(93.6%)

1,461%

253.9%

MGM Mirage (NYSE: MGM  )

(95.4%)

2,065%

432.2%

Office Depot (NYSE: ODP  )

(95.6%)

2,171%

510.2%

Source: Yahoo! Finance.

Obviously, if you managed to steer clear of these stocks until they hit their lows, then the multi-bagger results you've earned must feel good. But for long-term shareholders, those huge gains are only a drop in the bucket compared to what they'll need to earn just to break even since mid-2008. This rally would have to go on for an awfully long time just to put them back in the black.

The lesson here is that if you suffer the kinds of huge losses that these stocks have seen in the past year, you've dug yourself into a hole you'll be lucky to ever escape from. From that perspective, it becomes much more important to minimize your losses -- even if it means giving up some returns during bull markets.

How to cut your losses
So, what can you do to protect yourself from crippling downdrafts in stocks? You have several options.

First, adding bond exposure to your portfolio can play a vital role in avoiding huge losses even in big bear markets like we've seen in 2008 and 2009. Although the S&P 500 lost 37% during 2008, a portfolio allocated half in S&P 500 stocks and half in a long-term Treasury bond ETF lost less than 2% last year. And while that balanced portfolio is down a lot more than the S&P so far in 2009, the combined returns since the beginning of last year still put a 100% stock portfolio to shame.

In addition, other asset classes -- along with some strategic thinking -- have helped professional investors earn amazing long-term returns. In this month's issue of Rule Your Retirement, Foolish retirement expert Robert Brokamp speaks with Mebane Faber, co-author of The Ivy Portfolio, about foreign stocks, commodities, real estate, and other investments you may not know as much about as you'd like. Moreover, the interview looks at more active steps you can take to protect your portfolio -- including developing a strategy to reduce market exposure at times of maximum risk.

No matter what you do, don't let outsized short-term gains in beaten-down stocks make you forget that avoiding big losses is essential to your long-term success. While bull markets make investors forget about the bad times, real wealth comes from those who manage never to lose huge amounts of money in the first place.

For more ways to get your portfolio out of the dirt, read about:

Read the full interview with Mebane Faber and Robert Brokamp in this month's edition of Rule Your Retirement -- available free with a 30-day trial.

Fool contributor Dan Caplinger owns a variety of different types of investments, but he doesn't own shares of the companies mentioned. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't cost you a thing.


Read/Post Comments (7) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2009, at 1:30 PM, JRSmithman wrote:

    What rally? I think that all the stocks are down right now / so yeah this rally will not help for these stocks. Get a clue.. I would like it if you could write a retraction after the IPHONE APPS comes out, that is what I am betting on if this improves, but I know fools dont know how to write retractions, and only know one thing is to bash the stocks

    GO SIRI LONG

  • Report this Comment On May 13, 2009, at 2:08 PM, megabuc wrote:

    Citibank is on its last leg before the Fed closes this dream of a MADMAN that thought this monster of a failure could work and make money. Citibank will be taken out in 2009.

  • Report this Comment On May 13, 2009, at 4:07 PM, JerryJohnLigon20 wrote:

    Anti-casino stocks again.... Jim Cramer? You thought you are good with your analyzing? hic, hic... after the gaming stocks go too far from time you said they were not bottom yet - around $1.6. That is so fooled today to set you are "Cramer's take on headlines" haha.

    Hic, hic... The same voice what they said. All market fail off today, and it did not mean just gaming stocks. You guys need to estimate how much You guys should lost for short-shell today in near weeks. Hic, hic

  • Report this Comment On May 13, 2009, at 6:21 PM, 15deltawhiskey wrote:

    How can BWLD go up 1-2 dollars and then drop the same way day after day and month after month? Up-Down-Up Down.

    Same food, same prices, and many-many persons to eat.

    With a very professional company.

    Something fishy isn't there?

    Like a person says; Hey buy this stock and everyone buys and the stock goes up and the slickers go and cash in.

    If it is legal then that shows the crooked way these stocks run.

    And if it is not legal then they should be investigated.

  • Report this Comment On May 13, 2009, at 8:22 PM, Fredlee009 wrote:

    sorry rick for not seeing your post back, maybe it was after i stopped looking, not sure...

    definately wasnt intentional

    I will debate you in a special forum thread anytime you want.I will be civil and respectful of your opinions, as you gained some respect and deserve it for answering the challenge, even if i didnt see it...

    no name calling...

    Promise...

    I would gladly debate you freely anytime...

    have a good night...

  • Report this Comment On May 13, 2009, at 8:23 PM, Fredlee009 wrote:

    see, he mentions sirusxm so often i just assumed this was his work..

    sorry dan...

  • Report this Comment On May 15, 2009, at 7:52 AM, Trex762 wrote:

    I was in SIRI when it was a $5 stock, I was in the hole forover a 1000$,bought it all the way down to Finally sold it in the "Rally" when it hit 60 cents made 200$.

    Goes to show even a novice can make money in this market

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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