Sirloin Stock Information (SM)
September 02, 2005
Don't Lose All Your Money
By Tom Donaldson
That sounds like good advice doesn't it? Don't lose all your money.
After all what is an investor without funds in the brokerage account? Hint: BROKE!
On the subject of investing, this means getting out of a trade when it goes against you. Don't lose all your money. This is the MOST important thing any investor can do. Cut your losses before you're broke. It's easy to do, but some investors find it hard to implement. Don't become so attached to your buying decision that you ignore this advice.
Set a stop loss figure on every stock or investment you have. Decide on how much you are willing to lose before you buy. All brokerage accounts have a way to set a stop loss. You can do this right in your account so that it's triggered automatically.
Use an actual price or a percentage. Take the time to learn how to set up a stop loss order or trailing stop in your particular brokerage account. Or if you have the time and stick-with-it-ness to monitor your account on a regular basis (like all the time), keep track of where prices are mentally.
Here is an interesting chart that shows how much an investment has to go BACK up for you to get all your money out.
Take a look at this...
If the price per share goes down 10% - the stock has to go back up 11% for you to get back to even. Not convinced yet?
...down 20% - the stock has to go back up 25%.
...down 25% - the stock has to go back up 33%.
...down 50% - the stock has to go back up 100%.
...down 75% - the stock has to go back up 300%.
...down 90% - the stock has to go back up 900%.
Looking at this would suggest you are gambling if you set a stop loss at more than 25%.
Bottom line is, don't fight the trend and the hard reality of numbers - Use a stop loss to get out of any investment that goes bad. Don't lose all your money!
Tom Donaldson shares his investing experiences on his Panglossian Investor Blog and invites you to join the Panglossian Investor discussion group.
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