This is a question that has challenged investors forever – or longer!
It is especially challenging in times like these.
When we look at the stock market, we ask, “are we in a bubble? Is it about to burst?”
Charlie Munger of Berkshire Hathaway says we’re in a bubble.
Jeremy Grantham, Co-Founder and Chief Investment Officer of asset management firm, GMO, thinks so. On Bloomberg recently, he said we aren’t just in a bubble but in a Super Bubble and he is predicting a drop in the S&P 500 of 50%.
If the S&P 500, which includes 500 of the largest companies in the country, falls 50%, what could that do to stocks outside of the S&P, stocks in the Nasdaq or the Russell? They could go down even farther. And I witnessed that happen in 2000 and 2008. Some people lost 70% of their hard earned investments.
So, what should you do? Get out now? What if the bubble doesn’t burst for another year or more while you’re sitting on the sidelines holding on to cash? Not a good alternative. Perhaps you could invest in Treasury Bills.
Or, do you just assume the downside risk and continue your current approach to ride it out. Depending on what’s happening in the markets, economy, the world, it could be a real Dilemma.
There is another option. You could borrow a page from the Trend Following handbook and place “Trailing Stops” behind all of your positions.
The Trailing Stop initially helps to limit your losses providing some downside protection. That’s the good news. The better news is that eventually, it starts to lock in profits.
As an example: you buy a stock at $20 and place a Trailing Stop at $18. As soon at that stock’s price exceeds $22 you are now locking in profits. If the market turns and you sell at something above $20, you may have lost some profit, but your Nest Egg is still intact!
Warren Buffett once said, “The first rule of an investing is don’t lose money. And the second rule of an investment is don’t forget the first rule.”
Trend Followers, and other investors, take this rule very seriously. That is why we try to explain the importance of managing risk. One way to do that is the use Trailing Stop Orders.
In a future Tid Bit, we will discuss selling before your stock hits the Stop Loss.
If you are concerned about how to determine an appropriate Trailing Stop Loss, I’d suggest you go to https://TrendingStocks.io. For every trending stock we identify, we calculate a stop loss in both dollars and percent for your consideration.
As always, remember to – Ride your Winners and Cut your Losses.
If you haven’t signed up for our no commitment 4 week free trial, now is the time to give it a try and experience the benefits of taking emotions out of investing!