Marc Cuniberti: Establishing an ‘exit point’ in advance
Many investors took major losses on their stock portfolios in 2008 and 2009 and most would attribute those losses to plunging stock prices.
Beside the obvious stock price plunge, there are basic strategies that may have mitigated some of those losses, yet few investors utilize them.
One of the most important aspects of investing is not to lose money, or at least minimize the possibility of loss.
For if an investor is losing money, he obviously isn’t making any. An analogy would be you can’t go forwards if you’re going backwards.
A critical strategy in not losing money is having an exit point on your stocks, yet few advisors or investors have one.
An exit point is a predetermined level or price that you would sell your stocks.
The common mindset that prevents investors from limiting losses by having a predetermined sell point works like this.
Let’s assume the market starts to fall and an investor is looking at a 5 percent loss in his portfolio.
The investor or advisor handling the portfolio thinks “we’re only down 5 percent, that’s not anything to worry about”.
If the portfolio then drops 10 percent, the same excuse is used to continue to hold.
Now it drops 15 percent, then 20 percent, then 25 percent.
The same excuse of “it’s not down far enough” is continued.
If the market continues it’s descent, somewhere along the drop, usually between 25 or 30 percent, the investor or advisor then suddenly switches his mindset from “you’re not down far enough” to “you’re down too far now, you can’t sell here”.
What happened is the change in thought process never allowed for a sell strategy.
In essence, there never was an exit point, a point where the investors says “I’m down 24 percent or 25 percent — or whatever the number is — so “I’m out”.
Consider this. Investors are lucky the market stopped where it did last year.
If it hadn’t, the mindset of “you’re down to far now to sell” may have convinced investors and most advisors to ride the markets down to wherever the market stopped.
Not having an exit really means the investor never had a chance.
Unlike leaving a casino after you’ve lost a certain amount, in stocks, most investors don’t practice the same self control they would sitting at a slot machine.
Not having an exit point is like never leaving a house that’s on fire. You might not leave for a small fire in your oven, but you sure would get out if the kitchen was engulfed.
That the investor flops from “you’re not down far enough” to “you’re down too far to sell now” never allows for “cut the loss and run.”
There never was a fire escape or a point at which the investor, much like playing a losing slot machine, gets up and leaves the casino.
This common fault among investors leaves them open to massive losses and years of accumulated profits vanishing in one severe crash.
Interestingly enough, there is a point some investors will sell their stocks, and it’s a well-known point to market historians.
When the average investor is down massively, the investor (or their significant other) suddenly panics and says “we’ve got to get out with something!” and liquidates at the very bottom along with millions of other investors usually resulting in what it called a “final capitulation.”
The markets experience one final brutal sell off.
This “selling at the bottom” is classic among small time “retail” investors and is the reason why years of gains seem to vanish in market crashes.
Ironically, at the time most investors reach this capitulation point, that is usually the time the “smart” starts buying.
Establishing a “sell point” either by stock price or percentage loss might be a strategy investors should consider.
Much like a fire escape, know when its time to get out before the whole thing goes down in flames.
This article expresses the opinions of Marc Cuniberti and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at MKB Financial Services 164 Maple St #1, Auburn, CA 95603 (530) 823-2792. MKB Financial Services and Cambridge are not affiliated. Website: moneymanagementradio.com.
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User Legend: Moderator Trusted User
The MEME stocks are on fire again. You remember these. My last article on the MEMEs was the called “The Game that is Gamestop.”