I didn’t expect to hear this on a dusty Nicaraguan road…
“I don’t want to tell you how much I own of the stock… It’s more than you guys would likely recommend in your newsletter,” a subscriber said to me.
We were in Nicaragua for a Stansberry Alliance conference. It’s a chance to get to know each other, share market stories, and have some laughs along the way. Plus, several Stansberry editors pitch new ideas for what they expect for investments going forward.
When presentations aren’t going on, there’s also time for fun. That’s what we were doing when this subscriber wanted to get his confession off his chest.
We were heading to go surfing with some local surf guides. I got to lead the surf instructions. (I’ve been surfing for more than 25 years and love to teach anytime I can.)
“It’s been doing well for me. And hopefully it continues to do so,” he chuckled as our conversation continued…
All I could do was smile and say, “Well, good!” Remember, I can’t give individual advice to readers. So I didn’t bite and ask him more questions about that stock.
But this subscriber’s excitement has stuck with me for years. He couldn’t help but overextend into the trade, hoping for even bigger gains.
This is common in bull markets when the easy money is flowing. Folks feel good and pile bigger and bigger bets on the market.
The problem is, bull markets eventually turn into bear markets. And that’s when the real damage takes place. We’re darn close to that scenario right now. So today, I’ll share a simple way you can protect yourself if things get worse…
I’m not sure if the subscriber I met has followed our sell recommendations in the past… But after seeing him fall in love with that one stock, I’m sure it would be painful for him to do so.
It’s easy to think you can get out when it’s time. But as the markets fall, emotions run high. Some folks – like our reader – may have large positions at stake. And soon enough, investors abandon their plans.
The same excitement that makes you want to dive in can work against you. When a stock like that falls, folks double down and refuse to sell… until the worst possible moment, when the losses just get too big to stomach.
We are close to a bear market today in U.S. stocks. The S&P 500 Index “officially” fell 20% off its highs into Friday, though it rose to close flat on the day.
Official bear market or not, it has been a painful few months. And you likely have a few old winners that are falling sharply. That’s why the way you handle your portfolio right now is more important than ever…
The worst mistake you can make today is letting those winners turn into catastrophic losses.
You need an investment plan that tells you exactly when to sell your current stocks.
The easiest way is to use a trailing stop as your last line of defense. It’s a simple idea. If a stock falls below a predetermined price, you sell no matter what your gut says.
Here’s how it works. We’ll use Apple (AAPL) as an example…
Let’s say you own shares of Apple, and you’re hoping they will rise 50% to 100%. You can decide on a 25% trailing stop to protect your downside risk.
That way, you limit your loss potential while giving yourself a shot at big gains. If Apple is trading at $135 when you put on the trade, you will sell if it falls to $101.25. That’s your maximum pain point. And with a trailing stop, any time the stock’s peak moves up during the time you own it, your exit point rises as well.
Whenever Apple hits that sell stop, you sell your shares and move on. While a loss like that never feels good, it’s how great investors survive tough times. And they can look for better opportunities to make money.
Everyone’s risk profiles are different. You may want to use a 25% trailing stop while someone else is only willing to risk 15%. Or you might pick a hard stop instead of a trailing stop.
The exact stop isn’t what’s most important. It’s the fact that you put a stop in place to start with… and you sold when the stop was triggered.
By doing this, you never let small losses turn into portfolio-ending ones. And you can move on to find a better investment opportunity elsewhere.
Longtime DailyWealth readers are probably familiar with this idea. But we’re on the cusp of a new bear market. And that means it’s a crucial message to understand and implement right now.
Don’t let your emotions fool you into making big investment mistakes. Have stops in place… and stick with them.
Good investing,
— Chris Igou
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Source: Daily Wealth