Complex question, my answer will necessarily be brief.
My personal approach is long-term accumulation of companies which rate to add value long-term. I like to delude myself that I have the skill to pick those companies .
Anyway, assuming that I do a half-decent job of picking my long-term winners, I hate to disturb those positions. Clearly a side-effect of success is that 20 years down the track you will be sitting on prohibitive CGT liabilities, and liquidating your 'winning' positions, hoping to re-establish them with the after-tax proceeds of sale is a huge call which rates to fail more often than not. (even without considering the fact that nothing stands still and if you sit on the sidelines for 12 months you forego dividends and other favourable events).
Obviously this approach involves taking big 'paper' hits from time to time, which is the point that you raise.
The only credible way to address this problem is the method employed by Julian Robertson. If you fancy yourself as a stock picker, you should be able to identify not only the top 20% of companies and go permanently LONG, but also the bottom 20% of cr*ap companies and go permanently SHORT.
This method gives you most of the upside of the good companies, and smooths drawdown. You are betting that good companies will outperfrom cr*ap companies in all markets.
Personally, I cant bring myself to short good companies like WOW, WES, WDC etc.
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