Barry Ritholtz believes investors should have a “stock prenup” within their strategy to prepare for black swan events.
Writing in the Washington Post, Ritholtz explains that while individual black swan events may seem irregular, they do happen regularly and have occurred many times in the last decade.
He explains that, in order to prepare for these events, investors need to accept small losses rather than struggle with large ones. Ritholtz, cites Enron and Lehman Brothers as examples of stocks that imploded, that accepting a small loss was better decision than hanging on.
This doesn’t just apply to individual stocks, however. Ritholtz believe investors should know when to get out of sectors that are tanking, and accept their losses their too.
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