If you study the best investors around the world, each of them have a different investment strategy that bring them success in the stock market.
Despite their different philosophies, most of them would agree on one thing. Cut your losses!
Suppose you invested $10,000 in a stock and a few days later it dropped 8% from your entry price. If you implement your stop loss strategy at this point, you will incur a loss of $800 and you are left with $9,200 to invest.
With your remaining capital, you only have to make 8.7% on your next investment to get back to your original capital of $10,000.
If you are stubborn and hold on to your losses and then panic sell at 50%, you are left with $5,000.
You have to make 100% on your next investment to return to your original capital. How often do you make investments that return 100%?
Using a stop loss strategy is similar to buying insurance for your car. You pay an insurance premium to avoid bearing the full cost of repair in case of a crash.
Similarly, by taking a small loss, you can prevent yourself from suffering the 90% decline you see in some stocks during the financial crisis.
There will be times where the stock prices increase after you cut your losses. Don’t be too upset as protecting yourself against big losses is the main priority.
Besides, you can always buy back the stock by paying a higher price.
When you face a paper loss, do not allow yourself to commit the common mistakes that some of my clients made.
It may seem logical to buy more of your stock as it gets cheaper. But by doing so, you may be putting your portfolio at more risk than if you had taken the small loss.Back to Stock Investment Strategy from Stop Loss strategy