This past week there has been a huge break in the stock market. Almost without exception the talking heads on CNBC-TV, radio and all brokerage companies have been copying Alfred E. Neuman, “What, me worry?”
The Dow Jones Industrial Average has plunged more than 500 points and now investors are becoming nervous. They are starting to think about selling. Wall Street never wants anyone to take money away from them.
One of the very big shots of the largest brokerage house said this is a good time to buy. He has a reputation of being very secret about his investment strategy. If this is such a good place to buy why is he telling the little guy? That’s the one whose pocket he is usually picking.
There is not a single brokerage house that I have ever heard of that teaches brokers to protect clients’ money. How? Very simple. With stop loss orders. Brokers are discouraged from these types of orders.
For the past 3 years the market has been advancing and many investors have been recovering from the 2000-2003 losses and many new positions have accumulated good profits. Has any broker called his customer to encourage him to place an open stop loss to lock in those profits? The base answer is NO in capital letters.
Investment specialists such as brokers and financial planners have no clue as to how to do this. Most brokers ask other brokers what do to do. And the other brokers don’t know. Customers listen to the Wall Street line “you are in for the long haul” and “the market always comes back”. These are misdirections (lies) to keep them from selling.
Ask any investors who were fully invested in January 2000 and see if they have recovered to their original January 2000 amount not counting additions, of course.
Professional traders will always say you must keep losses small and let profits run. Small losses are your friend. Always know how much is at risk before the trade is initiated. Buying a $40 stock means not more than a $4/share risk. The upside will take care of itself with a following stop order.
People don’t like to take a loss. They want to wait for it to come back to even. “Even” is a loser because it is rare lf it comes back. It you bite into something that tastes bad you spit it out immediately. If you keep chewing on it and swallow it may kill you. That is the difference in a small loss and a big one that will kill an investment account.
An investor should pick up the phone to ask his broker what is the exit strategy to protect his account if this is the start of the next bear market. Listen carefully for non-answers.
Alfred E. Nueman says, “What, me worry? I have my stop loss orders permanently in place. I sleep well every night”.