Remember the three key items in investing I memtioned before:
How much of your portfolio should you spend on an investment?
When should you buy an investment?
When should you sell an investment?
I have told you about the first two keys – how much to buy and when to buy. Now I want to discuss when to sell. This may be the most important of the three, because if you don’t know when to get out of an investment, so risk a huge loss if you become married to it. A huge loss can offset a bunch of smaller winners in a particular year and make it a disaster.
Trailing stop losses can help tell you when it is time to sell an investment. Usually selecting a selling point of 20 to 25% of the purchase price of an investment allows you to take a little risk if it goes down then jumps back up, but will protect you from the back breaking loss (your stop loss starts at your purchase price and increases if the investment goes up. If you buy something for $1000, your stop loss is $750 – you lose $250. If the investment jumps to $1500, your stop loss increases to $1125 – you make $125 if it goes below your stop). If you follow the position sizing and asset allocation we talked about (5% in any one investment idea) and keep a 25% trailing stop loss the most you risk in any position is 1.25% of your portfolio. If you have 3 ideas you stop out of becuase they went down, and one good idea that generates a 15% return, you only batted .250 (you are a journeyman third baseman) but you made 11.25% being right on one our of four items. Warren Buffet’s 2 rules of investing are: 1. Don’t lose money. 2. See rule 1. THese rules have taken a lot of the hunches and guesswork out of investing; you just need good ideas. Just make sure you don’t get killed by your bad ideas.
Remember I can only answer general investment questions – call me at 818-317-6035 or email me at bstonercpa@sbcglobal.net . More advanced questions should be directed at the financial professionals in the resource section of my website:
https://briantstonercpa.com/Resources.html
You can count on us to count for you!