What Does Take a Bath Mean?
Take a bath is a slang term that refers to an investor who has experienced a significant loss from an investment. Investors whose shares have declined substantially are said to have taken a bath. For example, during the Great Recession between 2007 and 2009, or the crash of technology stocks in early 2000, many investors, because of their large losses, were said to have taken a bath.
Breaking Down Take a Bath
An investor may take a bath on an individual investment or on her entire portfolio. Stock-specific news, such as a company’s earnings or an unexpected profit warning, may result in an investor taking a significant loss. For example, an investor would take a bath on Amazon.com Inc. shares if the stock opened down 20% after a disappointing quarterly earnings result. A prolonged bear market may cause an investor to take a bath on his portfolio as a whole. Stocks in the same sector may take a bath due to industry-specific news. For instance, pharmaceutical stocks may sell off if the Food and Drug Administration (FDA) were to ban a specific drug.
How to Prevent Taking a Bath
- Risk Management: Investors can reduce the chances of taking a bath by using a stop-loss order. For example, if David buys Caterpillar Inc. for $160 a share, he could set up an automatic trigger to sell his holding if the stock trades below $140. Investors could also use the 2% rule to protect their capital.
- Diversification: Diversifying a portfolio minimizes the chance of it taking a bath. Investors could include different asset classes that have uncorrelated returns, such as stocks, bonds, cryptocurrency, and forex.
- Hedging: Investors can prevent a substantial loss by hedging their investments. Hedging strategies include using put options, short selling stock, or purchasing inverse exchange-traded funds (ETFs). For example, if Tim’s portfolio primarily consists of banking stocks, he could hedge by buying the Direxion Daily Financial Bear 3X ETF.
How to Recover After Taking a Bath
- Accept responsibility: Investors need to accept that they agreed to take the investment. Blaming their investment advisors or the market doesn’t recoup the losses. Instead, they should determine what factors contributed to the loss to try and prevent a similar situation from occurring in the future.
- Put the loss into perspective: If investors take a bath on a specific stock or their portfolio, they should look at their long-term investment returns. Stock market gains over many years typically offset short-term trading losses.
- Use the loss for inspiration: After taking a bath on an investment, an investor should determine where they have weaknesses and improve in those areas. For example, if a trader doubled his position to try to recoup a loss, he could work on strengthening his discipline.
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