What Does "Take a Bath" Mean?
The term "take a bath" is a slang term that refers to an investor who experiences a significant loss from an investment. Investors whose shares decline substantially are said to have taken a bath. The term can also apply to an investor's entire investment portfolio when there are major shifts in market forces that lead to significant losses. Some of the reasons behind such losses may include company- or industry-specific news or economic releases that affect companies.
- "Take a bath" is a slang term that refers to an investor who realizes significant investment losses.
- Investors can also take a bath when their entire portfolios lose a great deal of value.
- Company-specific, industry-related, and economic news can lead to significant losses.
- Investors can prevent taking a bath through risk management, diversification, and hedging.
- Accountability, putting losses into perspective, and taking inspiration from losses can help investors recover.
Understanding Take a Bath
Risk is any form of uncertainty that comes with putting your money into any investment. As such, investing can often be as risky a venture as it is rewarding. This means that values can fall just as much as they can rise. The financial industry has jargon that it uses when it comes to describing certain financial situations.
One of these is a slang term called take or taking a bath. The idea behind take or taking a bath is that an investor slips into a bathtub to clean themselves off. But in this case, they do so financially, wiping away any gains or profits, which are transferred to losses.
When an investor takes a bath, they experience a significant loss of value in their investment. In most cases, it refers to investors who lose a great deal of value in shares of a company's stock. In other cases, an investor may also take a bath on multiple investments when sweeping losses hit their entire portfolio.
There are many different reasons why an investor may end up taking a bath. Stock-specific news may result in an investor taking a significant loss. This can include a company’s earnings report or an unexpected profit warning that causes company shares to drop. Industry-related news and economic data can also put pressure on shares and lead to a decline in share or portfolio value.
Businesses can also take a bath. This occurs when corporations meet earnings expectations by using accounting techniques and tools to drop their earnings per share (EPS).
There are steps that investors can take to prevent themselves from taking a bath and ways they can recover from the significant losses they may experience. We've listed the most common ones below.
How to Prevent Taking a Bath
- Risk Management: Investors can reduce the chances of taking a bath by using a stop-loss order. This is an order that an investor can place with a broker to purchase or sell a security when it hits a certain price. For example, if an investor buys Caterpillar (CAP) stock for $160 a share, they could set up an automatic trigger to sell their holdings if the stock trades below $140. Investors could also use the 2% rule to protect their capital. This rule means that an investor would risk no more than 2% of their capital on any single investment
- 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 your portfolio primarily consists of banking stocks, you could hedge your bets by buying a financial bear 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 their position to try to recoup a loss, they could work on strengthening their discipline.
Example of Take a Bath
Here are a couple of hypothetical examples to show what it means to take a bath.
Let's say an investor owns shares in Amazon (AMZN). They would take a bath on that stock if it 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) placed a ban on a specific drug. In some cases, companies that didn't necessarily have anything to do with that drug may also be affected simply because they're part of that sector.
There are plenty of real-world examples of instances where investors took a bath. For example, the two-year period between 2007 and 2009—the time the Great Recession hit the world—was characterized by heavy losses not only in the housing market, which was the main cause of the crisis but also throughout the broader economy. In fact, American households and nonprofits lost roughly $14 trillion in net worth between 2007 and 2009.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal