Portfolio Volatility Risks | Podcast Episode #390

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Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance.

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Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

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You can succeed at the stock market, and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market.

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In today’s episode, we’re going to talk about portfolio volatility. This e-mail that I received from a listener, he asked to be called Joe DiMaggio.

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So we’ll just call him Joe for short because I never use people’s real identities on this podcast because 1020 years from now and this is still out there, there’s a good chance that they may wish

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that they didn’t have their name out there in the public for whatever reason. So I try to respect that.

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So this listener, right? Hey Ryan, just recently discovered your podcast and have been searching your catalog to listen to

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your episodes. I have been trading inside my IRA for over a decade, but only recently did I calculate my yearly

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profit and loss to see how I was doing. I mean, I knew I was up nicely but hadn’t figured out the percentage.

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The results surprised me and motivated me to keep going. I wanted to know what you thought of my gains and losses by year.

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Is this what most people get over the last 10 years? I’ve beaten the down the S&P eight out of 10 years.

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The NASDAQ. I’ve beaten 6 out of 10 years.

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This is how it has played out. 2014 I was down 2%. 2015 up 54 2016 Up 28 2017, up 39 percent 2018 up another 39% 2019 Up 35% 2020 Up 70% Jeez.

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Up 2021 79%, Down 34% in 2022 and up 41% in 2023. My account since 2014 through compounding is up about 1400% and my average yearly gain is 32%.

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My early gains were mostly on having bought Netflix early on.

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Later I took those gains into other trays and expanded from there. So are my numbers normal or am I hitting Hall of Fame kind of numbers lol.

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Thanks and keep up the great podcast Joe DiMaggio. OK, so good question here and 1st off great returns.

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Man, that is awesome. So I wanna highlight that.

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I mean, those are abnormal returns. They were great returns.

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And the fact that you beat the S&P 508 out of 10 years is awesome as well. Some people say, well, he should have been beating it 10 out of 10 years.

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And if he was a real pro, he would have been the NASDAQ 10 out of 10 years, not 6 out of 10 years. But that’s not so.

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And the reason why I say that is because for one, as a swing trader, we’re humans, so we’re fallible.

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We’re gonna have off years. There’s gonna be years that trip us up some.

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That’s just normal. That’s why risk management is so important is because when it does trip us up, we don’t want it to

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be portfolio defined that we can’t come back from it. Humans will falter and not every year are you gonna beat the market.

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And that’s one of the reasons too why I do think swing trading is important. But I also think it’s important too to have different kinds of accounts like for me or and for many

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others. You have like 401Ks, I have IRAs.

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I think those are important. I think long term accounts are important.

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I think for me as well I have fixed income accounts with bonds and I with dividend place. I think those are important to have because when I’m off of my swing trading, I wanna make sure if

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I’m on the wrong side of the trade and the market’s going higher. If I’m short, I want my long term stuff to at least still be doing well.

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And so I think it’s good to have that diversification on your strategies as well. Swing trading is great, but I also think some balances is important too because when there is those

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years where you’re off on your swing trading, it’s good to have other accounts that are actually beating the market.

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I want to highlight three specific years not even mentioned here because he wasn’t trading during these years, but 2000, 2001 and 2002. The S&P 500 in 2000 was down 9%.

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In 2001 it was down 11.9% and then in 2002 it was down 22%. The reason why I bring that up is because in 2022 the market was down 18% and for Joe here his

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portfolio was down 34%. So he almost 2X the losses from 2022, no doubt being up 1400%, you know over the course of all these

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years and a 34% decline was pretty significant. He made a really good comeback and he still made a really good comeback the following year being up

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41%. But the reason why I want to bring this up is that because in 2022 when he took the 34% loss, if he

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had $100 in his account, and I’m assuming it was much more than that. But for simplicity’s sake if he had $100 in his account, it went down to $66 in his account,

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That’s what the 34% loss would be. The next year he made 41%, but even then he was still down 7% from where the decline the year prior

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had started at. So again, back to those highs from 2021, he would not be there yet.

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He would still be about 7% short. And this all leads me to portfolio volatility.

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He has some pretty big wins here. He also has a year, you know the first year he was down 2%.

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I’m gonna probably consider that a little bit of an outlier since that was his first year and look at it more from 2022 which was a significant loss relative to the S&P 500.

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Again, this is not a podcast episode where I am criticizing him at all. It’s just some things to think about because the reason why I bring up the 34%, the 2X, almost 2X of

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what the S&P was down that year is because the 2000, 2001 and 2002. If you had $100 in your account, it went down to about $36.15.

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That is the impact that the market would have had using a 2X factor on Joe’s portfolio. So he would see his account go from 100 down to 36, which means he would need 177% return on the

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capital to break even. His average returns, he says in the e-mail, were 32% per year.

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That means it would have taken him 3 1/2 years just to get back up to break even if we went through another 2000 to 2002 kind of a scenario.

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And remember, during that time frame, NASDAQ was down over 80%. So what I’m trying to relay here is that he’s done good for the time that 2014 through 2023 he did

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marvels. Those are like Hall of Fame kind of numbers, really good.

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The only area of criticism is that it looks like he’s trading with some pretty high beta. Now, Netflix, he got it pretty good with Netflix, but there’s a lot of beta in Netflix.

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And when I’m talking about beta, it’s basically how much the stock fluctuates relative to the S&P 500.

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So that if it has a beta of two, that means if the S&P is up 1% one day, more than likely based off of historical patterns, that stock would be up 2%.

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I don’t know what the beta for Netflix has been over the years, but I’m gonna say it was pretty high just because as a trader I’ve seen that thing trade for over a decade now and it can get pretty

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wild. So he went through some pretty wild swings there with Netflix and in the end, kudos to him.

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He’s made a lot of money off of it. But what I want him to think about, especially now that he’s been able to make 1400% on his capital,

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which is awesome, is that how will he stack up if you have a massive decline where, you know for every $100 he’s only left with $36.15?

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Is that something that he can stomach? I’m not saying.

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And I get criticized for this some that, oh, he’s always talking about the sky is falling. No, I talk about risk.

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I talk about risk management. That’s one of the main themes of this podcast.

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And one of my favorite things to see besides people making money in the stock market is people keeping their money in the stock market.

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Because if you go back to like the dot-com bubble, for instance, and I think there’s a lot of parallels between what we’re seeing right now in the market with AI versus what we saw back then with dot-com, it

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took like 14 or 15 years for the NASDAQ to get back to its all time highs. There’s a lot of people that were hoping to retire during that time that weren’t able to retire

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because they didn’t manage the risk. And so that’s why I think it’s so important to manage the risk.

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And a great way to learn how to manage the risk is to check out swingtradingthestockmarket.com. With that you’re gonna get all my stock market research each and every day, big tech updates, stock

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market updates, daily watch list. It’s really, really awesome.

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And I’m getting ready to roll out Discord for that. So you’re gonna really like that as well.

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Really good stuff for you guys to be able to take advantage of. So check that out swingtradingthestockmarket.com and in the process you’re supporting this

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podcast. And the other thing I would tell Joe because, and I don’t have insight into all of his other trades

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here, but outside of Netflix, how well did he do? How much of those gains was because of Netflix?

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Because Netflix has gone wild over the years. You go back to when it first started trading.

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Netflix was down in 2014, not by a ton, but it was like down like 3% or so, I think just eyeballing it.

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But since then it has gone from $48 a share all the way up to 565%. So that’s more than 1000% gain.

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In statistics, we talk about outliers all the time. What is an outlier in a survey that’s being taken or in a political poll that’s being taken?

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I would tell him too to look at Netflix as an outlier. It’s a great outlier.

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I would like more of those outliers in my personal portfolio as well. But look at your portfolio outside of Netflix and then see how those returns also did.

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And you don’t even have to tell me about it. Just look at it for yourself and just try to figure out for yourself how was all your other

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trading. Because we do have outliers in our trading.

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There’s times where I have a stock that will go up 90%. That’s an outlier.

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It’s a great outlier. But we wanna be cognizant of those outliers, that they’re not skewing everything else, that they’re

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not covering up some other sins that we might have partaken in and we’re not willing to bring to the light.

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So keep that in mind and keep in mind that if there is another multi-year drawdown in the market. And I’m not saying that we’re going to have one maybe we go to the moon this time but in the case that

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we don’t, in the case that maybe the market has gotten a little too ahead of itself and there is a multi-year pullback, how are you positioned to be able to manage the risk?

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I’m also guessing that based off his portfolio returns that he has been primarily a long trader only.

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Maybe he’s thrown a couple of shorts in here and there, I’m not sure. But just looking at it based off of the returns, it would appear that way.

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And that is even more reason to ask yourself, OK, when there is a market pullback like what we just got in 2022 or maybe it’s a more extended one like what we got in 2008 or a more longer one based

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off of time frame like we got in the dot-com bubble. And they don’t happen often, but when they do, they can alter your portfolios in a dramatic manner.

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And you wanna be prepared for that because if you’re sitting here listening to my podcast right now and you’re 30 years old and you’re hoping to retire one day, by the time you’re 60, there’s gonna be

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multiple recessions that you face that’s gonna have a dramatic impact on your portfolio. And what you don’t want is for all those years of 30 or 40 or 50% returns on your long term

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portfolio or on your swing trading or whatever it is that you’re doing with your capital for it to just be flushed down the tubes and you’re trying to claw your way back to break even before those

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pullbacks ever happened because those are really dark frustrating times.

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If you do have an all-long portfolio and there’s nothing wrong with that, you want to make sure that you understand when should you not be completely long in the portfolio?

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If you’re using margin, even more so when should you be scaling it back to where you’re just using your own money?

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I’m not a huge fan of using margin, a lot of people are.

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I think it’s a very dangerous game, especially when you’re paying such crazy interest rates on that money right now.

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But what are you doing to protect your capital from just having a complete meltdown with your all-long portfolio?

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You wanna make sure that you’re protecting yourself to the downside. I use a lot of technical analysis in my trading so when the market starts to roll over, I’m

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starting to notice that with topping patterns, with trend line breaks of key support levels.

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And so I start to pull back with my longs. I’m not looking at longs.

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Sometimes I’ll even get short on the market from a long-term investment standpoint.

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I don’t buy anything from an investment standpoint from my long-term portfolio unless we’re hitting some massive, massive lows in the market. When the market’s sitting at all-time highs,

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right now I’m not adding anything so I’m not exposing myself to additional risk, but because we’re at all-time highs, everything in my long-term portfolio is actually up.

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Now if we get another 2022, yeah there will be stocks that go red and everything and I actually welcome that because I can add to a lot of my existing long positions and maybe even some more that

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I missed out on. But when it comes to long-term investing, rarely do you see me adding to a portfolio when we’re

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sitting at all-time highs. Instead, I’m looking for extreme, extreme oversold levels to start adding.

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So last year, for instance, in 2022 in my long-term portfolio, I started adding between like July and December of last year to my long-term portfolio.

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A lot of those played out pretty well, like Amazon and Google and Microsoft and the Qs, but there’s no way you’re gonna see me add to them.

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Now if we can get a 20–30% pullback in the market, would I start adding to those again? Absolutely.

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So that’s what I mean by if you’re gonna be in an all-long portfolio, you wanna make sure that the day that the market stops going higher that you’re not just completely yoloing into stocks at their

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all-time highs and then the market starts to pull back. And when it does you find yourself down 50 or 60% in your portfolio.

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If you enjoyed this podcast episode, I would encourage you to leave me a five-star review on whatever platform that you’re listening to.

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That really does mean the world to me. I do read them and greatly appreciate it.

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If you have a question that you want me to address on this podcast, feel free to send me your questions. ryan@shareplanner.com.

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I read them all and check out swingtradingthestockmarket.com. Thank you guys and God bless.

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If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.