How To Do Just About Everything
By eHow Personal Finance Editor
Rate: (8 Ratings)
Whether you are a first-time investor or a savvy investment guru, know that mistakes happen. The key to avoiding mishaps is to keep on top of investment rules, tax codes and annual reports.
eHow Personal Finance Editor
Comments
Anonymous said
on 11/22/2005 Probably one of the hardest things for investors to do is to part with a stock that is starting to lose money for them. First of all, remember that you start losing money when the stock price goes below your purchase price. It doesn't require you to sell your stock to "have a loss".
It is imperative for a successful investor to have an exit strategy for each and every investment decision. If you believe that you would like to own strong stocks, remember to sell your weakest stocks first and you will end up owning successful stocks in your portfolio. William O'Neil, of Investor's Business Daily fame, points out that if your portfolio is sort of a flower-garden that you are tending, and if you just sell all of your winners, much like the flowers you are growing, you will end up with a garden of weeds!
Thus it is important to weed out the weakest stocks quickly and to sell the winning stocks slowly.
In my somewhat aggressive approach, I sell all new stocks that I purchase if they decline 8% from my purchase price. In addition, I have sale points on gains where I sell portions of my stock slowly. Thus my bias is towards selling losers rather than winners! After I have sold a portion of a stock once at a gain, I move up my selling point to break-even on the downside. If I have sold at higher points, I move my selling-point up again to 50% of my highest appreciation point. Thus, if I sold 1/4 of my holdings of stock "X" at a 90% gain point (I always like to sell 1/4 of my positions, leaving the rest in play so to speak), I would sell all remaining shares if the stock retraced to a 45% appreciation level.
In summary, there really is no way to truly avoid losing money, but with active monitoring of our investments, we can limit our losses to small amounts and bias our trading activity to selling the weakest stocks in our portfolio leaving the stronger holdings to appreciate in the future!
Come and visit my blog, Stock Picks Bob's Advice, http://bobsadviceforstocks.tripod.com/bobsadviceforstocks/ where I discuss my approach from an amateur's perspective!
Anonymous said
on 11/22/2005 One of the most important parts of investing is to minimize one's losses and to maximize one's gains. Seemingly obvious, it is the exact opposite of human nature to be willing to sell losers and realize those losses and to avoid selling gains to "lock-in" profits. But that is exactly what you need to do!
After an initial purchase of a stock, with credit to William O'Neil of Investor's Business Daily fame, have adopted the strategy of selling an investment quickly if it moves in the wrong direction and gives me a loss of 8% instead of a profit!
In addition, when I own a stock that has mad a major move higher, I allow it to decline to only 50% of the highest amount of appreciation before selling the equity. In that way, I minimize my losses on new purchases, and preserve my gains the best I can on the rest of the stocks.
The other method of avoidance of losses includes avoiding compounding the loss. In my own portfolio, I use sales of portions of stocks at pre-designated price points, as a signal that the portfolio is healthy and I am thus "entitled" to add a new position to the mix, up to my maximum number of holdings I have established. When I sell a stock at a loss, or on a downward move, I avoid compounding that loss by immediately purchasing another stock.
This action, which we could describe as "listening" to your portfolio, prevents you from an endless quick loss, and re-investment of funds for another quick loss, in a downward bear market.
In other words, after selling a bad investment, don't rush to reinvest the proceeds. Use some other indicator, such as an internal portfolio "barometer" to signal you when it is safe to get back "into the water!"
Good luck and come visit my blog, Stock Picks Bob's Advice, at http://bobsadviceforstocks.tripod.com/bobsadviceforstocks/ where I discuss and share with you my own experience in investing!