The markets are a mess. It’s time to double down.
No, it’s not time to double down on your losing positions. It’s time to double down on your commitment to being a disciplined investor…[ad#Google Adsense 336×280-IA]It’s a serious time.
And while I’m personally skeptical of the full-on bear market case, I am fully prepared to be proven wrong.
And I’ve made sure that if I am wrong, I won’t get hurt too badly.
Making sure that you don’t get hurt too badly when you’re wrong is the great secret to ultimately succeeding as an investor.
You’ve got to be in a position to live with your losses.
You can’t allow the markets to dictate your emotions. You can take risks, but you need to understand the risks you’re taking… and be comfortable with them.
In today’s essay, I’ll show you exactly how you can do that…
I once asked an early mentor of mine, a 40-year veteran of the markets, “What’s the difference between the winners and the losers in the markets?”
I’ll never forget his reply: “The winners don’t need the money.”
You can’t risk more than you can afford to lose. It’s advice that I took to heart. You should, too.
Yes, we all want to grow our wealth through investing in the capital markets, but that happens gradually, over time. It takes patience… and you can’t get there without a solid risk-management plan.
Given current market conditions, it’s especially important to know how to manage market risk.
At the heart of any great risk-management plan is trailing stops. Long time DailyWealth readers know that trailing stops are an effective risk-management tool for individual investors because they limit losses and let your winners run.
I recommend using a simple 25% trailing stop. It’s a time-tested strategy which, backed up by my extensive back-testing, has proven to be an effective risk-management system over and over again. It’s widely used by experts like Steve Sjuggerud and Stansberry Research founder Porter Stansberry.
Let me show you how effective the 25% trailing stop is by using one of the hottest stocks of the past few years – Valeant Pharmaceuticals (VRX) – as an example.
Let’s say we bought shares of Valeant back in August 2014 for around $120 a share. About a year later, shares were trading for a little more than $260 – a gain of about 120%. Our trailing stop hadn’t been triggered… we were simply letting our winner run higher.
But as any investor can tell you, stocks don’t move straight up forever. Eventually, Valeant hit a rough patch.
In October 2015, we stopped out of the trade for a 67% gain. We sold when the trailing stop told us to sell. And it’s a good thing we did, because had we ignored our trailing stops, we would be sitting on a near-20% loss today. Take a look:
As you can see, the trailing stop helped us lock in our profits before shares crashed. It took the emotion out of our investing. Sure, we didn’t sell at the exact top… but we aren’t sitting on a big loss today, either. And we can live to trade another day.
Now that you see how trailing stops work, are you ready to double down on your commitment to be a disciplined investor? Are you ready to take advantage of these market conditions?
Using trailing stops is the best way I know to protect your investments and grow your portfolio safely.
Richard M. Smith, PhD[ad#stansberry-ps]
Source: Daily Wealth