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How a "smart-stop" could save you 19,491%

by , 16 April 2015

When you buy a stock and it doubles, what do you do?

Many investors would sell, feeling that they had 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 $214,420. And because, Russell sold them off, he missed out on the chance to bank 19,491%!

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 out on your investments ever again.

Cut your losers and let your winners run

One of the most important aspects of investing is one most investors aren't even aware of. Founder of TradeStops.com, Dr. Richard Smith explains this phenomenon…

"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 losses, hoping to get them back to breakeven."

Basically, these investors are doing the opposite of what they should be doing – cut their winners and let their losses run.
So how do you fix this problem?

Well, you set a stop loss at a level that leaves you with risk you can tolerate. When you get a stock that’s a winner, rather than selling it, you simply put on a trailing stop and let it run.

You see, winners are winners for a reason – often they'll be far bigger winners if you just stick with them.

The perfect stop-loss with a twist

This simple strategy forces you to cut your losses and allows you to hold on to the winners without you giving up your gains. Dr. Smith figured this out by analysing the portfolios of various newsletter editors.

And in almost every case, stop losses improved portfolio performance substantially.

But that wasn't enough for him.

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 adding his own special twist to it. He calls it the "smart stop" and it's tailored to the 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 plays.

Bill Bonner gives an example of how it worked using Stansberry & Associates Analyst Steven Sjuggerud True Wealth portfolio.  

Bill says, "Putting $1,000 into each of Steve’s recommendation 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.

So the conclusion for you is simple: Stop losses work, unless your investments are invincible, you should always use them!

If you want to find out more about "smart stops", check out Dr. Richard Smith's website https://tradestops.com/

How a "smart-stop" could save you 19,491%
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