Here's an investment strategy that everyone should consider especially if you are like me and self directing your retirement portfolio, or your investment advisor has let you down and your returns are less than stellar. Then join the crowd, we have probably all suffered large losses in the recent stock market collapse, at least more than we should have, especially if we had all followed our trailing limit stops. What’s this you say, trailing limit stops, what are they? A trailing limit stop is merely a stop loss. The idea is to keep from loosing large amounts on any investment you make.
If done correctly it should keep you from ever loosing more than 1% of your total portfolio or retirement funds. The first thing you should consider is position sizing. If you never invest more than 4% of your total portfolio in any one investment and if you set a trailing stop of say 25%, then that would be equivalent to 1% of your total portfolio.
Here’s an example of a trailing limit stop, if you buy XYZ stock at $50 and it goes to $100 and you have set a 25% trailing stop, then you should sell it if it closes below $75, this way you have protected your profit and you can ride your winners for all their worth and thereby increasing your returns. Now lets say that same $50 stock you just bought goes down and you have a 25% trailing stop loss, then you need to sell if it goes below $37.50 figured by multiplying .75 x 50 = $37.50. You may not have made money but you kept from taking a much larger loss in hopes that the stock would return to $50.
Something to keep in mind if you loose 50% on a stock it will have to go up 100% for you to break even. Take the example above if your $50 stock looses 50% and goes to $25, for that to go back to $50 would take a 100% move $25 x 100% = $50.
You can set your stops even tighter if you wish, at say 15 or 20% if that makes you feel more comfortable. This unfortunately is not a set it and forget it strategy. You don’t have to check your stocks daily but you should check them at least weekly.
It takes discipline to execute this strategy, even the most sophisticated investors have trouble with this, but nobody takes care of your money as good as you do , or as good as you should!
One last thing always keep your stops private, never enter your stops into the market or tell your broker what they are, market makers can see your stops and can manipulate the pricing to their advantage and possibly pick up your stock for a bargain.
Until next time.
Good Investing,
TC
