I think that this subject is the most important tool you can learn when figuring out the best way to invest. Why you might ask? Because without capital, there is no investing for you!
The better you can manage your losers and winners, the longer you can invest.
For some, this means more of a chance to lose money, but for me, this means more opportunity to find a big winner.
There are several methods we will use to preserve our capital:
Set a Strict Sell Point
I learned about this method after reading a book from Investor’s Business Daily. They suggest that you sell when any of your investments fall to 8% down. My personal level is 5% because of the volatile market we are in. You should set your level between 5-10% based on your personal preferences.
By setting a tight sell point, you will be shielded from holding a stock for emotional reasons (i.e. maybe if I hold it for another week it will come back up) as well as limiting your exposure to these big move days.
This makes it a lot easier to make money. For example, if you lose 5% on two investments of $500, you are only down $50 total to $950. It takes a 10% gain on your third investment of $500 to break even. If you allow yourself to lose 10% on each of the first investments, you now have to make 20% on your third to break even.
By keeping the losses small, it is much easier to make your money back and move onto profits.
Write a Plan for Each Investment
For this method, it would be best to have an investment journal. When you are looking to invest in a stock or ETF, figure out a plan. You should already have your sell point, all you need to do is figure out when you are going to sell.
I know this can be a very difficult thing to do, but here are several tips to help out:
- Figure out the areas of resistance ahead of your investment. Calculate the profit you will have at each point and decide if you want to simply take profits (at a minor point of resistance) or completely sell out (at a major point of resistance).
- If your investment is entering new territory, write down a couple price moves that would cause you to take profits. For example, if you are up over 10% and the stock pulls back over half of the previous day’s range, you will sell a portion of your holdings to secure the profit.
- Lastly, you can simply just say that you will completely sell out at a 15% profit and then reevaluate the situation to see if it is worth buying in again.
Invest a Proper Portion of your Portfolio
This is covered in this post. The idea of it is that you keep your investments relatively small compared to the size of your portfolio.
I have gotten myself into trouble when I found myself so confident in certain investments that I started to invest with double my normal amount. The result: I found myself down around 40% overall.
Moral of the story: keeping trades small keeps you in the game.
Find a Good Broker with Low Commissions
Once again, you can read all about the different brokers here. This is especially important for investors that have smaller amounts of money to work with (<$10,000).
If it costs you $30 just to buy and sell a stock, you are cutting into your profits pretty significantly. If you make 30 trades a year, it’s cost you $900 in commissions. Now, if you can get your commissions down to $10 to buy and sell, costs are reduced to $300 (which means $600 in your account).
Overall
These are four major ways that you can reduce your losses and keep your account squeezing the profits out of those stocks. By working on these, costs will be reduced and you will be that much closer to investing like a professional.
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