Take A Bath

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 their entire portfolio. Stock specific news, such 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 their 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 or her portfolio as a whole. Stocks in the same sector may take a bath due industry-specific news. For instance, pharmaceutical stocks may sell off if the Food and Drug Administration (FDA) 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 sell his holding if the stock trades below $140. Investors could also use the 2% rule to protect their capital. (For more, see: Forex Trading Rules: Never Risk More Than 2% Per Trade.)

  • 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.

  • Hedge: Investors can prevent a substantial loss by hedging their investment. 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 advisor 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 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 that area. For example, if a trader doubled his or her position to try and recoup a loss, they could work on strengthening their discipline. (For more, see: The Importance of Trading Psychology and Discipline.)