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Why every investor needs this exit strategy

by , 22 September 2017
Why every investor needs this exit strategy
When you buy a stock and it doubles, what do you do?

Many investors would sell, feeling like they've made a good profit. Then, they sit on the sidelines and watch as their stock goes higher and higher - cursing that they've sold too soon.

Founder of Agora Publishing, Bill Bonner gives a great example of this:

Financial writer Richard Russell of the Dow Theory Letters invested in Warren Buffett's Berkshire Hathaway shares in the early 1970s. The stock then doubled and he sold them off. And he's been kicking himself ever since.

You see, Russell bought Berkshire and Hathaway shares for $11. Now they're worth an incredible $262,800. And because, Russell sold them off, he missed out on the chance to bank 11944% return!

You too, could easily fall into this trap and lose out on potentially making yourself a fortune. But that doesn't have to happen, because here's one of the best ways to never miss the opportunity to bank massive profits.

The problem with investors is they tend to sell winners and keep losers

Founder of TradeStops.com, Dr. Richard Smith explains one of the most important aspects of investing. And one most investors aren't even aware of…
"When a stock goes up, you're pleased, but the effect grows weaker over time. Emotionally, investors become blasé about it. But when a stock goes down, their pain increases the further it falls. So they tend to sell their winners and keep their losers, hoping to get them back to breakeven."
So how do you fix this problem?
Logically, you set a stop loss at a level that leaves you with risk you can tolerate.
But the thing is, not all stocks are made equal. For example, penny shares could soar 30% in one day, while large-caps gradually increase 5% a month.
How do you compensate for this?

The perfect stop-loss with a twist

Well Dr Smith analysed the portfolios of various investment newsletter editors. And in almost every case, stop losses improved portfolio performance substantially.
But there was more to his study…
Dr. Smith explains that, "Not all stocks are created equal. Some are volatile and some aren't.  You don't want to get stopped out of a volatile stock because you set your stop loss too tight. And if you put your stop loss too loose on a stock without much volatility, it won't serve its purpose."
So he turned his attention to the common stop loss and added his own special twist to it and called it the "smart stop".
Smart stops are tailored to an individual investment. 
This formula varies from setting as little as 10% for blue chip stocks to as much as an 80% stop loss for riskier small-cap investments.
So if you’re a penny share investor; you can set a bigger stop loss to compensate for the volatility. This will ensure you don’t sell too soon.
Bill Bonner gives an example of how a smart stop worked using Stansberry & Associates Analyst Steven Sjuggerud True Wealth portfolio.  
"Putting $1,000 into each of Steve’s recommendations since 2000 produced about $30,000 in profit by 2014. Adding a simple 25% trailing stop turned the $30,000 into about $50,000. But by using "smart stops", it raised that amount to $55,000."
That's an extra $5,000 in the bank all using one simple tool.
Smart stops give you the best opportunity to let your winners run!
Until next time,
Always remember, knowledge brings you wealth,
Joshua Benton, Real Wealth
P.S. Using stop losses is essential for risk management in any portfolio. In the South African Investor, we adhere to strict smart stop strategies to protect our portfolio – which has helped us bank an annual 28% return for the last 17 years. 

Why every investor needs this exit strategy
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