20 Rules To Stop Losing Money
- Thread starter satish_ds
- Start date
Sorry Mr. Jaideep i quite didnt notice the second page of the replies in my post, i got it from this website called www.hardrightedge.com
regards
Satish
regards
Satish
Dont Let Fear of Losing Money Keep You from Investing
Guarding Your Wealth for Senior Citizens
Risk can and should be managed as we do other things in life
By Jeffrey D. Voudrie, CFP
Millions of people fail to own stock market based investments because they fear losing their money. Thats understandable. Lots of people lost 30%, 40%, 50% or more between 2000 and 2002. But it doesnt have to be that way! Dont let the fear of losing money keep you from an investment that can help you better reach your financial goals.
Read on to see how.
Risk can and should be managed. We do it every day in other areas of our lives. For instance, we manage the risk of getting hurt in a car wreck by putting on seat belts. We manage the risk of our house burning down with fire insurance. But somehow we throw out such common sense when investing in the stock market!
There are many ways to manage the risk of owning a stock. One traditional way is by spreading your money among several different stocks. This is called diversification. If you have 10 different stocks and something happens to one, hopefully the other 9 will be OK.
A second way is through Asset Allocation. This means that you should own a mix of bonds, real estate and equities because they go up and down for different reasons. Typically, if stocks go down, bonds go up.
Almost everyone utilizes diversification and asset allocation to minimize risk. But dont stop there. Dont have a false sense of security because your advisor tells you that your account is diversified. Taking one or two additional steps will make the difference between breaking out in a cold sweat and sleeping like a baby during a serious market decline.
One additional step is to have a pre-defined level at which the investment will be sold. This is referred to as a stop-loss. Some of you may be familiar with it, but have you thought about it in terms of how much money you have at risk?
For instance, if you had $10,000 invested in Enron, how much money were you at risk of losing? It was $10,000 because a company went bankrupt and the price of the stock became worthless. Therefore, every dollar was at risk.
If you had a stop-loss at $9,000 then the stock would have been sold once it declined to that level. Enron didnt become worthless overnight; it declined in value over a period of months. Relying on diversification and asset allocation would have resulted in a $10,000 loss. A stop-loss would have resulted in a $1,000 loss. Which would you prefer?
A second additional step can be taken to keep your profits from disappearing. Its referred to as a trailing stop-loss. As the share price of the stock goes up, so does the level at which the stock will be sold if it drops in value. Once the trailing stop-loss is at a point higher than what you invested, your principle is protected.
There are negatives to using a stop loss. The value of the stock could drop to that level, get sold because of the stop and then jump right back up in price. But that may be a small price to pay for the protection it offers.
Also, a stop-loss doesnt guarantee that the stock will get sold at that point. Once breached, the sale is executed at the next available price. If a stop is at $9 a share and the stock opens the day at $8, then the sale might be at $8.
Where a stop loss is placed will depend on the type of strategy being used. If its a longer-term investment that you want to give plenty of room to run, then you might use a 15% stop. If its a shorter-term, more speculative oriented investment you may want a 3% stop.
The key is that your risk is significantly reduced. If you knew that your risk of loss was around 5% (or less), wouldnt you feel much more comfortable being invested in the stock market?
Like a seat belt and fire insurance, a stop and trailing stop-loss can drastically reduce the risk of investing. We would never dream of owning a home and not having fire insurance. We should approach investing the same way.
Guarding Your Wealth for Senior Citizens
Risk can and should be managed as we do other things in life
By Jeffrey D. Voudrie, CFP
Millions of people fail to own stock market based investments because they fear losing their money. Thats understandable. Lots of people lost 30%, 40%, 50% or more between 2000 and 2002. But it doesnt have to be that way! Dont let the fear of losing money keep you from an investment that can help you better reach your financial goals.
Read on to see how.
Risk can and should be managed. We do it every day in other areas of our lives. For instance, we manage the risk of getting hurt in a car wreck by putting on seat belts. We manage the risk of our house burning down with fire insurance. But somehow we throw out such common sense when investing in the stock market!
There are many ways to manage the risk of owning a stock. One traditional way is by spreading your money among several different stocks. This is called diversification. If you have 10 different stocks and something happens to one, hopefully the other 9 will be OK.
A second way is through Asset Allocation. This means that you should own a mix of bonds, real estate and equities because they go up and down for different reasons. Typically, if stocks go down, bonds go up.
Almost everyone utilizes diversification and asset allocation to minimize risk. But dont stop there. Dont have a false sense of security because your advisor tells you that your account is diversified. Taking one or two additional steps will make the difference between breaking out in a cold sweat and sleeping like a baby during a serious market decline.
One additional step is to have a pre-defined level at which the investment will be sold. This is referred to as a stop-loss. Some of you may be familiar with it, but have you thought about it in terms of how much money you have at risk?
For instance, if you had $10,000 invested in Enron, how much money were you at risk of losing? It was $10,000 because a company went bankrupt and the price of the stock became worthless. Therefore, every dollar was at risk.
If you had a stop-loss at $9,000 then the stock would have been sold once it declined to that level. Enron didnt become worthless overnight; it declined in value over a period of months. Relying on diversification and asset allocation would have resulted in a $10,000 loss. A stop-loss would have resulted in a $1,000 loss. Which would you prefer?
A second additional step can be taken to keep your profits from disappearing. Its referred to as a trailing stop-loss. As the share price of the stock goes up, so does the level at which the stock will be sold if it drops in value. Once the trailing stop-loss is at a point higher than what you invested, your principle is protected.
There are negatives to using a stop loss. The value of the stock could drop to that level, get sold because of the stop and then jump right back up in price. But that may be a small price to pay for the protection it offers.
Also, a stop-loss doesnt guarantee that the stock will get sold at that point. Once breached, the sale is executed at the next available price. If a stop is at $9 a share and the stock opens the day at $8, then the sale might be at $8.
Where a stop loss is placed will depend on the type of strategy being used. If its a longer-term investment that you want to give plenty of room to run, then you might use a 15% stop. If its a shorter-term, more speculative oriented investment you may want a 3% stop.
The key is that your risk is significantly reduced. If you knew that your risk of loss was around 5% (or less), wouldnt you feel much more comfortable being invested in the stock market?
Like a seat belt and fire insurance, a stop and trailing stop-loss can drastically reduce the risk of investing. We would never dream of owning a home and not having fire insurance. We should approach investing the same way.
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