When we go to the circus we see a trapeze artist working on a high wire or swing either alone or with other athletes. They know what they are doing because of constant practice, but every once in a while there can be a mistake, even a small one that can cause one of them to fall. The result is death or serious injury when they hit the ground.
When you look below them you will see a net. Thank goodness. No one wants to see them get hurt. As expert as they are they take precautions. In almost every profession or athletic event there is some kind of safety net available and this is true in the stock market for all investors. There is never any reason for investments to fall to the point the investor is hurt. Is there a net that breaks that fall and keeps the investor from losing all or part of his money? Yes there is.
It is called a Stop Loss Order. Brokers don't like them and never recommend them because it means he must watch your account and the average broker has too many customers to do that. However, you can instruct him to place an Open Stop Loss Order that means it is automatically in every day protecting your shares from loss. If you are not allowed to place this kind of order you should move your account to another brokerage house. They obviously don't care about protecting your money.
Let me give you an example. Suppose that last year you bought Cisco Systems (CSCO) at $50 per share. The first question to ask yourself is how much am I going to risk in case this stock goes down instead of up? You put up $5,000 and bought 100 shares. How much are you willing to risk? $500. $1,000. More? Well, today it is about $15 so if you did not have a loss protection you would be out $3,500 and that is too much. The Stop Loss Order is your Safety Net! If you don't have one you can be seriously hurt. One of the basic rules is never to lose more than 10%. Look at what you own to see if you would have more money today if you had placed a Stop Loss Order just below the highest closing price for your stocks. I know you would be money ahead.
There are literally thousands of stocks that have lost 80% and 90% of their value. For those poor people (pun intended) who did not have a safety net they are badly hurt and some are just about dead. Sorry, folks, it did not have to happen.
I don't care what you own. Now you should immediately look at everything in your portfolio and decide where you need to place those stops. If you don't put a net in place you could be hurt.
Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.
Copyright 2005