Few things about investing are more frustrating than being "right" about a stock but not making any money because you sold it. But there are steps you can take so that you stop getting shaken out of stocks too early.
There are few things more frustrating in investing than being “right” about a stock but not making any money. You do your research, pick a stock and buy it.
Then for any number of reasons you end up selling it, only to watch it soar after you’ve sold (usually right after).
And then you feel like an idiot.
But this happens to every investor. Anyone who tells you they’ve never experienced the pain of being right and not making any money is lying to you.
It has happened to me many times. In fact, it took me about 15 years to stop doing it on a regular basis. When I think about all of the gains I’ve left on the table in my life, it makes me sick to my stomach.
But there are steps you can take so that you stop getting shaken out of stocks too early. Hopefully, the steps below will help you cut down the amount of time it takes learning market lessons the hard way, and you won’t spend 15 years kicking yourself like I did.
Step 1: Place a stop loss
There are many ways to do this. The Oxford Club’s typical trailing stop is 25% below the entry price and is moved up as the stock climbs higher.
For example, if we buy a stock at $20, the initial stop loss is $15. That gives the stock plenty of room to move due to market noise without having to sell. If it does drop to $15, the trade clearly isn’t working and it’s time to exit.
As the stock rises, we adjust our stop upward, to protect our profit. So if the stock is trading at $28, we move our stop up to $21. That way, if the stock slips, we can still get out with a gain.
Step 2: Put the ear plugs in
There is so much bad advice out there, it’s truly amazing. When the market crashed in 1987, a team of 30 economists issued a joint statement that the next few years would be as bad as the 1930s — the Great Depression!
They couldn’t have been more wrong. Analysts, pundits, economists and advisors all have opinions, and often those opinions are tied to an agenda. If you’ve done your own homework, stick with your opinion. You can always change your mind as new facts emerge. But just because some guy quoted in The Wall Street Journal doesn’t like your stock doesn’t mean he’s right and you’re wrong.
In fact, Wall Street analysts have a long history of being late to the party, so ignore them.
Step 3: Know your history
Markets go up over the long term. In fact, they go up over the intermediate and short term.
Since 1926, the market has gone up 74% of the time over one-year periods. It’s been up 83% and 86% of the time over three- and five-year periods, respectively. And over 10-year time horizons, the market has gone up 92% of the time. In fact, the only 10-year periods when the market didn’t go up were during the depths of the Great Depression and Great Recession.
You can always sell part of your position if you have a big gain and take some risk off the table. I do this frequently with options in my trading services because options can be volatile. That way you put some money in your pocket and have less capital at risk, but will still participate in the upside.
Generally speaking you want to let your winners run, but if it will help you sleep at night and stay in the position by taking a little money off the table, then go ahead and do it.
You’re never going to time the markets perfectly. No one can. But by sticking to the rules above, you’ll hang in there longer and when you’re right, you’ll actually make money.
Marc Lichtenfeld is a senior analyst at Investment U. See more articles by Marc here.
The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.