HOW STOP LOSS ORDERS MAKE MONEY
You probably know what a stop loss order is, but I better explain because your broker does not want you to use this technique to protect your investments.
If he doesn’t want to follow instructions you better get another broker because he is going to lose your money. His brokerage company also does not want you to do this because even if you don’t trade and leave your positions dormant they still make about 1% while you are losing equity.
Let’s say you bought a stock or mutual fund for $40/share. It doesn’t matter how many shares. You know this little hummer is a
dead-bang winner and is going to make lots of money. However, Doozy, has not decided to go up and instead now is on the down
escalator. Do you have a stop at $36? Are you willing to risk more than 10%?
Your broker, financial planner or whoever it was that touted Doozy says it is going to come back. You watch it lose 10%, 20%, 30%, 40% and your tummy now begins to rumble. What happened? Don’t bother to ask the “experts”. They don’t know either. Now you want to get your money back so you will sell it when it gets back up to “even”. Fageddaboutit! “Even” is for losers. If Doozy is down 50% it means it has to go up 100% to get out where you got in. Do you really think there is much chance of that happening?
Would you now be willing to settle for 90% of your money back?
Most folks would. It means you now have most of your money and a chance to find another equity (or even a mattress) where your money will at least be safe.
It very simply means that even after all the so-called research the wonderful equity you bought went the other way. It is OK to be wrong, but it is NOT OK to stay wrong.
The Buy N Hold that is taught by brokerage companies is why small investors never become big investors. No one can ever expect to invest over a 30 or 40 year period and expect to make any more than keep even with inflation – if that. Buy N Hold is for their benefit not yours.
If investors had sold all index funds at the end of 2000 they would not have been exposed to the 78% drop of the NASDAQ or the 40% drop of the S&P500. No they would not have sold the top or bought the new buy signal at the bottom in 2003, but investors would have had 70% more cash in their accounts.
You and only you can protect your money. Brokers will not do it. Even 401K managers will not do it. You must call now and advise them to transfer all fund positions into a money market account. They won’t like it, but it is your money not theirs. If they balk ask them to guarantee the value of your present account. Watch how fast they run on that one.
When you buy any stock or ETF immediately enter and OPEN STOP LOSS ORDER for the amount you are willing to lose if you are wrong.
Mental stops don’t work because you won’t sell when you should. Let the market do it for you.
Protection of capital is the most important consideration for the investor. CYA.
Al Thomas’ book, “If It Doesn’t Go Up, Don’t Buy It!” has helped thousands of make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com
Discover why he’s the man Wall Street does not want you to know. Copyright 2008. All rights reserved.