On the second-to-last Friday in October, Keystone
Resort in Colorado opened for the 2021 ski season
with 40 acres of terrain and two miles of trails. On the
very same day, the S&P 500 and the Dow Jones
Industrial Average both hit new record highs.
Of course the two events are not at all related, but
investors would be well-served remembering that
chasing a peak stock market is a lot like skiing a risky
slope. The journey is thrilling, but perilous.
Know your risk level
Market highs often tempt investors to chase
momentum, which sets them up for a dangerous fall.
A less hazardous run is wisest for the long pull:
Staying put and sticking to your risk level at all times.
If you venture out to Keystone or any of the other 31
ski resorts in Colorado, you need to be careful
because you can easily find yourself in the middle of
some very intimidating ski terrain littered with steep
grades and cliffs, exposed rock, narrow cat tracks and
very high ski lifts.
Make sure you read the maps because when taking a
lift to the peak of a hill, you just might find yourself
seeing very little in any direction except the edge of
the narrow ridge you are standing on and other
mountains off in the distance. There might be – quite
literally – nowhere to go but down, and fast.
For some, this produces a desire to retreat. The
safest way down from the top of the mountain is to
hop back on the aerial tram and ride it to the bottom.
You are technically safe, but you miss the point of
being there in the first place.
For others, the adrenaline rush is addicting. The
opportunity to test their skill, courage and, yes, luck
offers a heady excitement. Each time they make it
down safely, they begin to forget about all the rocks
and cliffs they passed on the way up. Their past
success breeds confidence.
Navigating stock market peaks
As U.S. markets continue to reach all-time highs,
many investors feel like they are standing at the peak
of one of Colorado’s 32 ski resorts. Like the skier who
laughs off the risks, investors who stretch too far
expose themselves to potentially devastating results.
Let’s look at two investors who go through the same
market rise and subsequent market decline.
Investor Green has a diversified portfolio that
earns 10% during the rise, then loses 10%
when it drops.
Investor Black Diamond has a very
concentrated portfolio that earns 50%, then
When the market climbs, Investor Black Diamond is
praised as a genius at the ski lodge. Everyone wants
his advice, and he can’t talk about his investing
prowess enough. Investor Green, meanwhile, is
overlooked as being a conservative, vanilla investor.
Consider the impact of big losses
What many investors fail to remember is that big
negatives hurt performance far more than the
Remember, if each portfolio is worth $100, then:
Investor Black Diamond gains $50 first, or
$150 in total. A subsequent 50% market dip
then leaves him with $75, or a loss of 25%.
Investor Green, on the other hand, gains a
modest $10 to move to $110. Her subsequent
10% loss leaves her with $99, or a loss of 1%.
When you hear about the mathematics of compound
interest, it’s almost universally in a positive context.
The more important discussion, however, is the
impact of losses.
Remember, it’s simple math:
A 10% loss requires an 11% return to break
A 20% loss requires a 25% gain and
A 50% loss requires a 100% rebound
Skiing off a cliff just once can erase all the gains you
What kind of skier are you?
Everyone wants Investor Black Diamond’s portfolio
when markets rise and Investor Green’s portfolio
when markets decline. We all know that consistently
achieving that result is nearly impossible in the
investment world, yet many people can’t help
themselves from trying.
Stretching for yield during times of low interest rates,
abandoning underperforming asset classes, or
making guesses about what lies ahead are sure ways
to increase the potential for a large loss. Conversely,
investors who seek shelter miss out on future gains.
Stay in your comfort zone and remain committed to
the level of risk appropriate for your personal goals.
Talk to your financial advisory team – the professional
ski instructors of Wall Street – and they can help you
navigate the terrain for an enjoyable ride.
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