Okay, now how does this all work together? First, select the investments you want, making sure you diversify between assets and across industries. Now pick somewhere between 20 and 25 investments and put equal amounts in all of them (keeping position sizes between 4 and 5 percent of assets.) Keep track of your stop losses – either 20% or 25% of the investment. The worst case situation – an investment drops below your stop loss. If you follow your stop and sell at the open the next day, with the position size of 4-5% your worse loss will be 1 to 1 1/2% percent of your assets. A few of these will probably hurt a little, but you have small losses to deal with rather than big ones. If a couple of investments take off, you can let your winners run, using the stops to stay in the investment and then tighten your stop loss and when you sell you will protect most of your profits. Best of all, you can do it without thinking about it; you just follow the rules and have better control of your investments. Over the long haul, using these simple ideas to create an investment plan [...]
CPA Financial Musings: Part 4 – The Trailing Stop Loss
Ok, you are in your investments; now when should you get out of them? The answer is the trailing stop loss. When you buy an investment, set a stop loss of 20 – 25% of the investment value; if the asset drops that amount, you sell on the open the next day (this will prevent a sudden drop in the price and rebound, called a whipsaw, from taking you out of an investment by hitting your stop loss then rebounding back above – wait until the close and see if you are still below your stop; also it is not a good idea to log your stop losses in with your broker, keep them in your head or on a spreadsheet.) The 20 – 25% stop loss will keep you in a trade long enough to give the investment time to become profitable without stopping out too soon.The reason to use a ‘trailing’ stop loss is that when the investment moves in the direction you want it to, you move your stop loss up to protect your profits – if you start with a 20% stop you continue raising the stop until you are stopped out. The best part of [...]
CPA Financial Musings: Part 3 – Position Sizing
When you are investing, an important consideration to minimize losses is to not put too much of your investing capital into any one idea. A good position sizing rule of thumb is to limit each particular investment to 4 to 5 percent maximum of your total investible assets (one exception is if you are in a plan that invests in stock of the company you work for and you have investment options, do not invest more than 10% maximum in your company.) This will limit your risk by spreading it out over a bunch of investments.Tomorrow in Part 4 I will talk a little bit about trailing stop losses and how they protect you from major losses.Remember, for financial, accounting and tax musings,You can count on us to count for you! email bstonercpa@sbcglobal.net phone 818-317-6035 Website www.briantstonercpa.com