The (Obviously) Best Way to Handle A Bad Bear Market
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I sold my position in TQQQ this week.
I netted an 84% profit. Woohoo.
Why did I sell it?
Make no mistake, TQQQ is awesome in many ways. It goes up 3x more than QQQ and can compound gains like a madman. Oh, and it can beat a trading superstar, too.
What's the problem then?
2022 is the problem.
Yikes, that's a massive drawdown during our most recent Bear Market. (And, by the way, our Trading Superstar recorded no results for 2022 in her stellar record; she also traded TQQQ).
It makes sense, of course. What goes up 3x must come down 3x.
Here's the problem, though.
The '22 Bear Market was so bad, TQQQ has never caught up. Here's how it compares to SPY from January 2022 to now:
TQQQ is far behind SPY since the Bear Market. The drawdown has been too much to overcome. Will it in time? Maybe. If we don't see another Bear Market soon (and everyone says we're on the edge of a major pullback).
But that's not all.
Unfortunately, TQQQ doesn't have data going back to the Great Financial Crisis of 2008. That Bear Market was deeper than 2022.
If we crunch the numbers and make an educated guess, TQQQ would've dropped 90% in 2008.
But that's not all.
If we go all the way back to the Dot-Com Crash of 2000-2003 and use QQQ as our guide, the estimated drawdown of TQQQ during that time period would have been...98%.
Do your own math but that's terrifying.
And look at what happened to QQQ from 2000-2012 when compared to SPY:
The massive Dot-Com drawdown on QQQ was too steep. QQQ is still negative over a decade later and is trailing SPY by a mile.
What's the solution? Is there a way to handle bad Bear Markets?
One way that sounds good on paper is to add in an inverse fund. This goes up when the market goes down.
So, let's add SH (ProShares Short S&P 500) to QQQ and use an allocation of 70% to QQQ and 30% to SH that's rebalanced annually. Will that keep us out of trouble?
Here's the report from 2022-now:
Yes, it helped the max drawdown numbers, but we have another problem.
Now it's lagging SPY.
It did help us handle a Bear Market in 2022, though. Did it help from 2008 until now?
Again, it did help the drawdown, but it made a lot less money overall.
Is there anything else we can do?
Yes. We can do the obvious thing.
Instead of nervously wringing our hands during a Bear Market, we can add money each month. Remember what Mr. Buffett says?
Buy when others are fearful.
So this time let's go back to 2008 and simply add $250 month to our original stake of $10,000. If we do that, here's what the testing shows:
If we just add funds to QQQ during Bear Markets, we end up with a lot more money for about the same drawdown.
Putting money into our account is the obvious and best way to handle crashes. And that applies to holding stocks or using trading systems.
That said, maybe we're in a position to need to draw money out, not add money in.
In that case, we'd be better off trading something other than tech or high growth, or possibly adding in an inverse ETF to our portfolio (or buying puts).
Because Bear Markets do not treat high-growth instruments kindly.
Talk to you soon.
DISCLAIMER: This is not financial advice.
It should not be assumed that the methods, techniques, or indicators presented in these videos will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
