![How the faint-hearted and fearful can shield themselves from equity risks](https://www.hotz-partner.ch/images/publikationen/Hotz_Publikation_108_750px.jpg) # How the faint-hearted and fearful can shield themselves from equity risks Efforts to avoid losses often fail due to poor timing and come at a high cost, which eats into returns. In times of economic and geopolitical uncertainty, many investors feel the need to protect the gains accumulated on their equity investments, so as to avoid losses in the event of setbacks. One way of achieving this aim is to use stop-loss limits as protection. This can be done selectively using stop-loss sell orders, either on specific equities or on the entire equity portfolio. If the price falls below the limit, the shares are sold automatically, thereby eliminating further downside risk. The wonderful thing about a stop-loss is that it costs nothing. Investors protect their shares against a fall in price without having to pay an insurance premium. If the stop-loss is not triggered and prices continue to rise, investors can also benefit fully from future gains. Full benefits in fair weather, free protection when the storm clouds gather: it all sounds like the Holy Grail. ## Irreparable damage What are the arguments against setting stop-loss limits? A stop-loss is no free lunch – quite the opposite. It carries the risk of causing lasting, irreparable damage to the portfolio. One problem is that most stock market setbacks are not major crashes but perfectly ‘normal’ corrections of 5, 10 or 15%. Such setbacks usually occur once or even several times a year. If, for example, the stop-loss is set at 10% below the current price or the previous high, shares will disappear from the portfolio fairly quickly after an almost routine correction. Take Apple: anyone who bought the shares ten years ago at under $30 (adjusted for share splits) and set a stop-loss would have sold them long ago. The limit would have been reached several times after interim corrections, triggering a sale. After a dip of 10 to 15%, however, the share price rose sharply again, so the investor was no longer able to benefit from Apple’s long-term upward trend. The damage therefore comes in the form of foregone gains, and it is highly doubtful whether a better stock would have been bought with the sale proceeds. Moreover, many investors tend to lock in gains on securities that have performed well. This strategy is extremely dangerous, because sooner or later it means selling precisely those shares in companies with a long record of success, such as Apple or Microsoft, while leaving the loss-making junk positions languishing in the portfolio. > «Fearful investors consistently get their timing wrong when it comes to buying and selling.» A common wish among investors is to sell shares with the aim of buying them back after a fall of 15 or 20%. ‘Sell high, buy low’ may sound lucrative, but usually turns out to be an illusion in practice. Experience teaches two important lessons. First, most investors sell their shares only after prices have already fallen significantly in times of economic and political instability. Investors are never gripped by fear when the sun is shining on the markets, companies are reporting outstanding results and the world is free of major conflicts. Investors get scared when the storm is raging outside, with thunder and hailstones. They sell procyclically at the worst possible moment, just when prices are low and, from a countercyclical perspective, they should actually be buying. Second, the lucky few who do manage to sell their shares before a bear market generally do not buy back in at significantly lower prices. This is quite simply down to the mindset of many investors, whose behaviour – unlike share prices – can be predicted with a certain degree of reliability. If, after a fear-driven sale, share prices plummet far enough for investors to get back in at prices 15 or 20% lower, they will not do so, for the simple reason that their fears have grown even more acute in the meantime. This is almost inevitably the case, because the world has become much more uncertain and the stock market thunderstorm has since turned into a hurricane. In a climate of eroding equity prices, investors gripped by fear will stay out of the market for purely psychological reasons, even though their ideal scenario has become a reality. Either they never dare to get back in, or they do so only once the global economic and political situation has improved – at higher prices, mind you, than those at which they sold. Fearful investors consistently get their timing wrong when it comes to buying and selling. ## The best days on the stock market Anyone who hedges at the wrong time – and thereby effectively sells – also misses out on the best days on the stock market. Interestingly, the biggest daily gains come not during bull markets but during pronounced bear markets. Take 13 October 2008, for example, the best day for the Swiss stock market in the past 25 years, which fell right in the midst of the turmoil of the financial crisis. Just a few weeks earlier, UBS had to be propped up by the Swiss federal government to save it from collapse – investors’ nerves were in tatters. The euphoric daily gain of 11.4% was in response to the announcement that major US banks would be partially nationalised. It may seem counterintuitive, but every one of the ten best trading days since 1998 occurred during a crisis: the financial crisis (five days), the dot-com and 9/11 crisis (two days), the Russian crisis (two days) and the Covid crisis (one day). The Covid crisis is a case in point: after a sharp correction in spring 2020, share prices rose by around 20% in just three trading days. Anyone who hedged at the wrong time is probably still tearing their hair out today. Investors can buy put options as an alternative to a stop-loss order or to selling shares. This works much like taking out car, theft or life insurance. A shareholder who, in return for paying a premium, protects their securities against a crash hopes that they will not need to claim on the insurance and that their shares will continue to rise. This approach also has its pitfalls, as the premiums paid for put options are particularly high precisely in times of uncertainty, which significantly reduces returns. What’s more, no one can systematically predict bear markets as opposed to merely getting it right by chance, which is why the risk of mistiming the hedge is high. In particular, anyone who believes they can anticipate how US President Donald Trump’s erratic decisions will affect the stock market in the current complex geopolitical environment is suffering from a monumental case of overconfidence. Enduring painful volatility and unpredictable setbacks during uncertain times on the stock market is the price for the outstanding long-term returns offered by equities. Those who can bear the risk of short-term fluctuations and adopt a long-term mindset can do without any form of protection. Those who cannot stomach them despite having the capacity to bear risk are among the faint-hearted and the fearful, and should steer clear of equities. The Hungarian stock market legend André Kostolany once put it this way: ‘On the stock market, two times two is never four, but five minus one. As an investor, you just need the nerve and the money to ride out that “minus one”.’ --- ![FuW](https://www.hotz-partner.ch/images/logos/finanz_pub.svg) 30. September 2026 --- Author **Pirmin Hotz** is the founder and owner of Dr. Pirmin Hotz Vermögensverwaltungen, based in Baar, Switzerland. --- Categories - Anti-cyclical - Forecasts - Long-term - Timing --- [ Download PDF ](https://www.hotz-partner.ch/images/publikationen/pdf/2026-09-30_Hotz_-_FUW_Absicherung_von_Aktienrisiken_f%C3%BCr_Mutlose_und_Angsthasen_EN.pdf "How the faint-hearted and fearful can shield themselves from equity risks") [ Dispute over UBS: ‘That statement is utter nonsense’ ](https://www.hotz-partner.ch/en/publications/dispute-over-ubs-that-statement-is-utter-nonsense) #### Aktuelle Publikationen [ ![How the faint-hearted and fearful can shield themselves from equity risks](https://www.hotz-partner.ch/images/publikationen/Hotz_Publikation_108_1725px.jpg) ### How the faint-hearted and fearful can shield themselves from equity risks Dr. Pirmin Hotz30. 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