Downturn Survival Notebook, Vol. 1: De-Risking — Cut Exposure First

Even though the U.S. stock market is known for its long-term upward trend, market declines are far from rare. Statistically, index drawdowns of 15% or more have occurred at least once in almost every year since 2020, while 8–10% pullbacks are even more frequent.

Since declines tend to be deep and fast, the damage can be significant. That’s why investors need a practical, actionable playbook for surviving down markets.

Moomoo Learn has prepared a four-part Downturn Survival Notebook series—this is Volume 1, and the following three ones will be released soon.

Following is the summary of today's key points：

Why Cutting Exposure Matters

When the market is falling, the most effective move—and the one that needs the least skills—is often not hedging, but reducing net risk exposure: trim positions, raise cash, and lower beta. The value of cutting exposure lies on that it immediately de-couples the move of the market and of your portfolio, so you’re no longer being dragged around by volatility.

De-risking fits three classic market conditions. First, you’re not confident about direction and worry the downside may continue. Second, your position size has grown so large that it starts to affect your emotions and the quality of your decisions. Third, your portfolio is overloaded with high-volatility, high-valuation names with concentrated event risk. In that case, even the most sophisticated options structures can become distorted because the underlying risk is simply too large.

The Structured Way

In practice, trimming should be structured, not random. Start by cutting what drags the portfolio the most—names that are (1) high-volatility, (2) in a weak trend, (3) illiquid, or (4) overly narrative-driven—instead of cutting the position indifferently on all stocks.

Besides, you need to set a clear target for yourself: for example, reduce equity exposure from 100% to 60%, and let cash become your “optionality.” Cash isn’t surrender; it’s safety margin. It gives you the flexibility to re-enter, to scale into dips in multiple tranches, and even to hedge further stepdown.

The most common mistakes are “panic liquidation” and “whipsaw chasing”: when you see it’s down, you sell; then when you see it bounces, you buy back, then it drops again and you sell a second time. That's a vicious loop...

The right mindset is this: you’re reducing risk ahead of the market's meltdown, and you buy it back when the drawdown is deep enough.

Cut or Hedge: That Is the Question

When a drawdown hits, beginners often get stuck debating whether to cut exposure or hedge with index puts. But if you’re already debating that, it usually means your position size is affecting your emotions. Set a hard de-risking line—for example, a 10% drawdown from your portfolio peak. Once that line is triggered, act immediately. Don’t hesitate.

Of course, where you set the de-risk triggering line is not arbitrary. If it’s too tight, you’ll be forced into frequent scaling in and out, creating unnecessary friction costs. If it’s too loose, you may end up de-risking near the lows—only to watch the market rebound right after. One workable approach is to estimate your portfolio beta through a weighted average of each holding’s beta. (For options, you can approximate beta exposure by taking the option’s effective leverage and multiplying it by the underlying stock’s beta.)

Set Clear Criteria

Some technical indicators can also help with regime judgment, such as the 20-day or 50-day moving average. The 20-day moving average is often a practical short-term gauge of market strength. If the index breaks below the MA20 and fails to reclaim it for a period of time, it’s a sign the market has shifted from strong to weak.

Takeaway: when the market pulls back and you don’t know what to do, reduce your exposure to a level where you won’t get “taught a lesson” by the market—your execution becomes easier, and your mindset improves.

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