According to a top former hedge fund manager, investors should watch to see if their stocks dramatically outperform averages during a market rally.
The prominent former hedge fund manager, Jim Cramerwarned that when profit shoots up too much and quickly, volatility could turn against us. In this regard, he warned that High yields can leave investors vulnerable to huge losses during a big sell-off.
“The best time to determine if you are making too much money, that is, if you are taking on a dangerous amount of risk, is during a big market rally,” said the specialist. “Use these rallies as diagnostic tests to see if your portfolio has too little diversification and too much risk, or if it’s just fine.”he added.
In this regard, it was illustrated that GameStop Corporation shares soared 1,625% during January 2021but after setting a historical record they collapsed 91% to the relative minimum of April 2024. It is because of cases like this that Cramer, although he admitted not being the most conservative investor, clarified that taking on too much risk is not prudent.
“Suppose the rebound comes and you earn much more than the averages, the question is: why? Were you using margin, borrowing money from your broker to get a little more leverage?” he asked. “That will help you crush the averages in a rally, but it will also crush you with your losses in a sell-off. “That’s just not worth it,” he said.
Cramer also considered the relevance of creating a portfolio that is properly diversified among high-quality stocks purchased at a good price and not get carried away by very short-term volatility.
Source: Ambito
