The hardest lesson to learn for investors is that you must always cut your losses short quickly, especially with stock investments. In the stock market, you must sell any stock that declines a maximum of 7% to 8% from your purchase price. No exceptions!
This rule is easy to learn and understand, but very hard for most people to implement. But sticking to this rule is essential. By using this rule you can have a number of small losses and still stay in the game.
Letting small losses grow into large ones will eventually wipe out your account and you will no longer be able to invest.
You have to always work to protect your investment account!
The fact is that you are simply not going to be right all the time, especially when investing in the stock market. In fact, you will be wrong more often than you are right. And being wrong means you don’t make money – you lose money.
The good news is that if you invest correctly, you can still become wealthy despite losing more often than winning.
For many investors, selling a losing stock is difficult because selling makes the loss real. On paper, there is always the hope that the price will come back up.
No, paper losses are real losses; you just haven’t admitted to them yet!
Also, selling a losing stock is difficult because you have to admit that you were wrong. Men especially have a hard time with this one. Ego, education, stubbornness, and the need to be right all contribute to investors not selling when they should.
People let their emotions determine their decisions in investing, and this is deadly.
It’s easy to defend a losing investment by holding on and not selling, arguing that it will come back. Worse, many investors start looking for reasons to justify holding a stock even though it is losing them money. They start searching through the investment message boards and looking up articles on the company. They start trying to find reasons or encouragement from other investors why they should hang on.
When a stock falls from its purchase price, they hope that it will go back up. That’s human nature. But hope will keep them in the stock until the loss becomes large.
On the other side, when a stock goes up, they start to fear that it will come back down and they will lose their profits. So they end up selling too soon. They ignore the fact that a rising stock is showing strength, and it can keep going up for a long, long time.
It’s not uncommon for an investor to look back after several years and see that they bought a stock at 10 and sold it at 18. They were happy at the time to make a 80% profit. But the stock is now at 136, and they only participated in a small part of this move. Fear caused them to sell too early for no good reason.
Capital Properties
Nice content and tips that every investor can follow through it.