Ignore this vital investing rule and you’ll pay the price

Julie Brownlee, Fsp Invest, 19 Feb. 2015

Tags: investing, investing strategy, stock market, losses, cut your losses, investing tips, risk management, stop losses,

Investing provides you with a great opportunity to put your money to work on the stock market and grow your wealth.

But there’s one vital, well-known investing rule that most investors ignore – to their detriment.

If you choose to ignore it, your portfolio will suffer.

Read on to find out more…

The key to making money on the stock market

You’ve most likely heard the stock market adage: Cut your losers and let your winners run.

Yet it’s one thing that most investors don’t do. They hang onto losing shares in the hope that one day they’ll recover.

But the fact is, when investing, the longer you hold onto a losing share and the more its share price drops, the bigger the problem.

If a share drops 25% in value, a 25% recovery in price won’t take you back to your breakeven point. You need the share to perform even better than that.

And the more you let a share sink, the bigger the recovery you need.

Why you must cut your losses

Have a look at the following, Frank Hemsley in Forex Round-Up explains…

  • A 25% drop in share price needs a 33% gain to compensate.
  • A 50% drop in share price needs a 100% gain to compensate.
  • A 75% drop in share price needs a 300% gain to compensate.
  • A 90% drop in share price needs a 900% gain to compensate.

You should keep a note of these stark facts.

If you’re ever in need of a reason to sell a losing share, just look at what you need its price to do for you to recoup your losses.

You’ll never be 100% right with your share picks. No-one is.

The key to investing and making money over the long-term is to understand this and to know that selling shares at a small loss is vital to your investment success.

That’s why adhering to stop losses is so important.

Cut your losses and your portfolio’s performance will benefit.

So there you have it. Why you’ll pay the price if you ignore this vital investing rule.

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