Dr. Sue isn’t stupid…
She’s a rare – almost unheard of – triple-boarded physician. And she trained at Johns Hopkins University – one of the most prestigious places where you can study.
And yet, she almost lost more than half of her savings thanks to one critical mistake. Let me explain…
In the 2000s, Sue and her family were scoring big on small Chinese stocks.
But when the markets crashed in 2008, Sue made a fatal error that I’ve seen ruin portfolios… As her investments collapsed, she wouldn’t sell. By the time she asked for my help, her portfolio was already showing losses of 80%, 93%, 95%, and so on.
She lost more than $50,000 because she didn’t use stop losses.
Poor investors see every loss as a failure. But small losses aren’t failures. They are victories – victories against big losses. You must avoid big losses at all costs. Few can survive a big loss.
Good investors know this: Losses are part of the game, and small losses don’t matter.
As an investor, having an exit strategy is vital to your success. If you stick to your exit strategy, it can serve as a near-foolproof way to methodically cut your losses and let your winners ride.
One of the best exit strategies is to set stop losses. These are set prices or percentages you use to know exactly when to sell.
There are two types of stop losses: hard stops and trailing stops.
Hard stops are based on a set price or percentage below the purchase price. If the stock falls to that amount at any time, you sell.
Let’s say you purchase Stock X at $10 and set a 20% hard stop at $8. No matter what the stock price rose to for Stock X, once it fell to $8, you would sell.
Trailing stops are based on a percentage below the purchase price, but they don’t stay the same. As the price rises, the trailing stop follows it.
For a trailing stop, let’s say you would initially set it at 20% below your purchase price. So for Stock X, you’d start out at $8, the same as a hard stop.
Here’s the difference… As Stock X’s price rises, the trailing stop also rises. So if the stock rises to $11, the stop would rise to $8.80. If Stock X kept going up to $15, the stop would be $12.
Trailing stops only adjust upward and stay set on the highest price the stock hits. So in this example, if the stock hits $15 and then goes down, you would sell at your trailing stop of $12. But suppose the stock falls to $12 and you sell, and then it shoots up much higher. In that case, you’ve still made a $2 profit ($12 – $10 purchase price), but you’ve forfeited any future gains.
Both strategies work well in different situations. So now you might be asking…