Resolve to Not Lose Money in 2009

December 10, 2008
By seadmin

The New Year is almost here, and soon we’ll all be making our list of New Year’s resolutions.  I got a head start on mine for 2009, and here’s just a sneak peak at what I want smart investors to resolve to do next year:

  1. I will prepare my family for a tough economic environment in 2009.
  2. I will have a positive increase in my liquid net worth in 2009.
  3. I will save in excess of 10% of my gross income in my retirement accounts.
  4. I will save and safely secure at least three months of living expenses.
  5. I will stop losing money on bad investments or bad investment advice.

Of all of these resolutions, perhaps the most important is number 5. You see, losing money on bad investments is perhaps the most frustrating thing that can ever happen to you. To accomplish this goal, you need to adopt a new mindset. You need to adopt new investing techniques, and you need to get rid of and get out of bad investments as the market returns to rally mode.

Although there are many ways to make sure you don’t lose money, one great technique is to set trailing stop losses on all of your invested positions.

Although the mechanism for setting a trailing stop loss varies depending on which brokerage you use to place your trades, the principle of a stop loss is the same everywhere and it shouldn’t be thought of as complicated. When you set a trailing stop loss on a new position, you are telling your brokerage firm to sell that position as soon as it falls whatever percentage you set from the buy cycle high. Let me explain.

If you purchase a stock or ETF for a hypothetical $10 per share and you have placed a 10% trailing stop loss order on that purchase, the stock or ETF will be sold if it falls to $9 per share. If, however, the stock or ETF rises after your purchase to $20 a share, then comes back down to $18 per share, your position will be sold at $18 per share. 

A trailing stop loss allows you to protect yourself from a quick dive in the share price of your security, and it allows you to protect your gains in the event that the security soars and then pulls back sharply.

If you are unsure of how to set a stop loss, then please consult the Web site of your online brokerage, or call your brokerage and ask for instructions on how to do so. Most online brokerage firms make it easy to set trailing stop losses, and you can do so whenever you purchase an ETF or common shares of stock.

Please take the time to learn how to set stop losses. In this fast-and-furious market, having a trailing stop loss in place is absolutely essential to making sound trading decisions.

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