The Best Exit Strategy for Any Investment
InvestorEducation / Learning to Invest Apr 03, 2012 - 02:09 PM GMTBy: DailyWealth
So... when do YOU sell?
What? You don't know? How could you not have any kind of plan?
Let's say you hold shares of Apple today at over $600 a share. You bought them a couple months ago below $400 a share. When is the right time to sell?
Look, this is your hard-earned money... I'm sure you don't want to lose it. And I'm sure you spent plenty of time figuring out what you wanted to BUY and when. But how will you know when to SELL?
Today, I'll show you how...
If you don't have an exit plan, you're not alone... I would bet that 99.9% of investors don't know when they're going to sell, either.
"It is the No. 1 mistake investors make," Dr. Richard Smith told me as we sat down for coffee yesterday. "They have no plan for when to sell. Ultimately, that results in occasional big losses, which permanently affect their portfolio."
Richard would know... He has a Ph.D. in mathematics. He has a powerful team of database programmers working for him. And he has studied and crunched the numbers on stocks and portfolios in every way you can imagine.
"What is the best exit strategy to use to prevent those big losses?" I asked him. "Is it a percentage trailing stop, a volatility-based trailing stop, a dollar-loss-based stop, some other exit plan... what?"
Here's what he told me: "The best exit strategy is the one PEOPLE ACTUALLY USE."
He said, "Steve, actually, your 25% trailing stop is brilliant. It's incredibly simple. It gives the average stock enough room to fulfill its upside potential... Yet it kicks you out if you got it wrong. There's no need to mess with that."
He wasn't flattering me... He was making a point that what we're talking about here is not a mathematical issue. It's about emotions...
"It's just ridiculous that people get attached to their stocks and ride them all the way down," Richard told me.
"But our brains are wired to avoid being wrong... We have an urge to be right and a desire to avoid regrets. All of those things are working against us in the stock market."
The point here is, we often have emotional trouble selling a stock at a loss... But a successful trade is made up of two parts: a good buy and a good sell. If we want to make money in the long run, we need to learn how to sell.
"Real winners in the markets are investors that can actually pat themselves on the back when they take a loss," Richard explained. "These folks are taking pride in their willpower. They know they are conceding a small battle with that loss as part of winning the war in the long run."
I can tell you from experience, this is never easy... When I sell something at a loss, I am proud of myself for sticking with my strategy. But it is never a "happy" day. It never feels natural. But it is right.
I asked Richard what he thought DailyWealth readers should do.
"Have an exit plan with your investments, period," he said. "It's absolutely crucial, but most people don't have a clue."
Richard said my recommended 25% trailing stop strategy was a great way to go for most individual investors... It's simple and it works – it keeps people from hurting themselves.
What's your exit strategy? When are you going to get out of Apple... or the rest of your portfolio?
You don't know?
Well, figure it out... now.
Good investing,
Steve
P.S. For more on trailing stops and Richard, visit www.TradeStops.com. The site offers an incredibly easy way to keep track of your exit strategies, with a 30-day free trial. DailyWealth readers can access a 50% discount to a year's subscription here. (As always, I don't receive any compensation for mentioning Richard or his program.)
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
Customer Service: 1-888-261-2693 – Copyright 2011 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Daily Wealth Archive
|
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
