1. The 10% rule, A Good Investment is One that Returns 10% or more.
An investment that falls 10% will need to gain 11.11% to break even. If an Investment falls 50% it needs a 100% gain, or to double its stock price to recover your investment.
2. Understand the Exponential Relationship
Young investors think that a stock will rebound and that’s why they hold on when it falls. Understanding that the gain keeps accelerating as the fall grows will help young investors sell a stock when the loss surpasses 10%.
3. Losses Hurt, Live to See Another Day
Because it is more likely that a stock will not gain 10%, it is important to cut your losses once a stock falls more than 10%. Young investors have the ability to take on more risk, so cut your losses and invest in something better or reinvest (make more money).
4. Missing out on losses Can Make You Gain more
If you have $10,000 and you want to make sure you capitalize on that, don’t dwell on missing gains. Rather capitalize on major losses. In the pictures below look at the impact of capitalizing on missing losses over missing gains.
5. Strategy to Mitigate your losses, Save Some Cash
Don’t spend time waiting for your money to rebound in one stock, rather take the loss and invest somewhere else. Put money in other stocks and Indexes, or hold your money. Preserving capital, leaves you with cash to invest when an opportunity arises.
6. Have Discipline
It’s hard to save cash during a raging bull market when everyone is making easy money. However, saving cash for when a correction occurs or when undervalued investment presents itself, can help you make major gains in the long run.
Preparing for a loss and containing it can ultimately help you invest longer and better. Understanding the drawbacks of losses help young investors make more calculated decisions.
Learn more on Minimizing losses with Torre Financial: https://torrefinancial.com/limiting-losses-and-preservation-of-capital/