Buy low and sell high; it’s the ultimate investing tip, although never easy to execute. That’s where the second-best investing tip comes in: control the risk that comes with investing. One of the best ways to do that is to have an exit strategy when taking a position on any 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
Of course, in a volatile market, this can lead to short term trading, a strategy proven to produce poor results over time.
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.
If its rising, lift the sale target below it. You dont need to sell a rising investment because you set an arbitrary target. Let winners run….
Modest Money 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.
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.
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.
Sean @ One Smart Dollar 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.
I don’t dabble in individual stocks but I bet I could do the same with mutual funds. Instead I just dollar cost average but it works for me.
Buck Inspire 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!
Robert @ The College Investor says
Solid tip! You could also sell high and buy low – short it baby!
Carrie Smith 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.
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