100 Words On: The (Second) Best Stock Market Investing Tip Ever

Buy low and sell high; it’s the ultimate investing tip, although never easy to execute. That’s why it’s so important to control the risk that comes with investing. One way is by having an exit strategy in place whenever you take a position on a stock, bond or any other investment. That is, establish pragmatic predefined selling points — for both a profit and a loss — that take emotion out of the equation.

The bottom line: There’s no guarantee an investment will be bought at the optimal price — but if we’re smart, we can always control how much we ultimately lose.

Photo Credit: Katrina Tuliao

Comments

  1. 1

    Oscar says

    Of course, in a volatile market, this can lead to short term trading, a strategy proven to produce poor results over time.

    • 2

      Len Penzo says

      So can I assume you are advocating trading on emotion and not having an exit strategy? If so, good luck.

      Every strategy has its risks. Depending on the time period, longer-term buy-and-hold trading has been shown to provide poor results over time too.

      I see absolutely nothing wrong with de facto short-term trading if it results in meeting preset goals sans emotion.

      • 3

        Oscar says

        You, sir, are a hypocrite. You routinely use figures like 5 – 8% returns in your estimates and calculations for various articles, citing it as a “reliable long-term market return”, but now you say that long-term can be risky during certain market periods. Enjoying that cake?

        Of course I’m not advocating investing on emotion. But what you are advocating can quickly devolve into trying to “beat the market” in a volatile market. If you know how to do that consistently (snicker), why not post those tips?

        • 4

          Len Penzo says

          Oscar, don’t be a bozo. First off, I do NOT routinely use 8 percent returns, nor have I ever cited that figure as a “reliable long-term market return.” As far back as 2009, five percent has been my typical reference point when calculating long-term returns, as you can see here:

          http://lenpenzo.com/blog/id970-retirement-savings-why-my-kids-shouldnt-plan-on-receiving-an-inheritance.html

          … and here:

          http://lenpenzo.com/blog/id1176-dont-be-a-sucker-why-private-schools-are-financial-rip-offs.html

          In fact,I specifically state that the 8 percent market returns are a myth and that most people should expect 4.5 percent (based on past performance) here:

          http://lenpenzo.com/blog/id1499-financial-rules-of-thumb-that-are-really-old-wives-tales.html

          Enjoying that cake?

          So … if 5 percent is too high for you, then what percent returns would you advocate I use? I think 5 percent is more than reasonable. Five percent is pretty darn close to the long-term average of 4.5 percent — so what’s your beef?

          Finally, how can what I am advocating devolve into “trying to ‘beat the market'” when you’re using preset levels for selling at a gain or a loss? The selling point is predetermined. It’s simply an automatic form of risk reduction; there is no trying to do anything — other than minimizing risk.

          Whether one prefers buy-and-hold or shorter-term investing (I am agnostic on this, by the way) you seem to overlook the fact that sometimes people have stock options or other investments with shorter horizons where they have to sell within a limited time frame — so long-term investing isn’t possible anyway. In those situations, without an exit strategy those people can get caught holding the bag; I speak from experience because it happened to me a few years ago.

          So, to wrap up … as usual, you make absolutely no sense, sir. But based upon the countless number of (usually) dubious contrarian comments you leave on my other articles, I think most of my regular readers already realize that; it’s your m.o., after all.

          You’re in a hole, Oscar. Don’t you think it’s time to quit digging? Sheesh.

  2. 5

    says

    I haven’t got into the stock market yet, but I’m not sure about having a set point to sell for a loss. It seems that may set a panic trigger. Usually it seems better to ride out those tough times and think more long term. I guess it depends on how risky the investment is overall.

    • 6

      Len Penzo says

      Okay. But I’m not sure how predetermining how much loss you’re willing to accept on a particular investment and then setting a stop-loss order based on that decision can be considered a panic trigger.

    • 7

      Guy says

      This is a huge issue that many investors have and it is wrong. If you are losing money on an investment then bail! This “it might go higher” isn’t helpful right now. Your money isn’t working for you but against you and you need to cut your loses before they get worse. Don’t hold onto a stock that is losing value hoping to make back lost money. Put it towards something that will do better.

      HOWEVER! It also matters WHY a stock is doing poorly. Sometimes a stock gets nailed for reasons that won’t keep it that way forever. In those cases then yes, hold it despite it losing money past a certain point. Look at Carnival after their accident, they got nailed but that doesn’t mean you should have sold the stock, but actually probably should have bought some as you know the stock would have bounced back.

      Stop losses mean you end up selling when everyone else is selling because they are panicking. I assume you bought it for a reason so it seems silly selling it for a loss when you LIKE the stock. This should be when it is at a discount and you should be buying it. Knowing when something is over-valued is more difficult.

  3. 9

    says

    While we are almost never going to buy on the bottom or sell at the top we can at least play the theory. if something has a drop of 5-10% I start looking at adding to my position. If it goes up 5-10% I will lighten a little. Can I miss a huge run up of course but in the long term I am almost always going to come out ahead.

  4. 11

    says

    Sound advice. Still grappling with emotional investing, but if you have disciplined buy and sell points, you eliminate emotions as it turns into a mechanical process. Best way to go because emotions and investing don’t mix!

  5. 13

    says

    If we only listened to the investments, instead of listening to ourselves as investors. Taking the emotion out of money is pretty tough, but if we finally do it, we could be much better off.

  6. 14

    says

    Here’s one: If your stock doubles, sell half. You get your money back AND you have the same amount you originally invested => have cake/eat it

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