Wouldn’t investing be great if the old adage of “buy low, sell high” were consistently true? However, it’s human nature to dislike losing, and emotions often sway our judgement. That’s because when we lose on stock, not only do we hurt our pockets, we also injure our egos.
It happens frequently. Investors take the profits from selling an investment that has been appreciated. However, they cling to declining stocks in the hope they will bounce back. Unfortunately, these investments usually sink to a fraction of their original worth.
How Do Investors Avoid This Situation?
One way is to become a disciplined investor and develop a profit/loss plan. Financial risk experts and advisors JCRA group are here to explain exactly what a profit/loss plan for investing is.
A Profit/Loss Plan Explained
A profit/loss plan is a step many investors overlook. On a stock, it essentially limits the maximum losses and gains an investor will take. Putting constraints on your losses is a vital component of investing, so this plan is integral to a reliable strategy.
Losing money in the stock market is something that every investor experiences at one time or another. However, what makes for a great investor is the ability to recognize these previous errors of judgement and use them to advantage.
A profit/loss plan help you recognize your errors by giving you the opportunity to disconnect from your emotions when you are investing. If you see gains as solely a means of increasing cash flow—instead of using them to boost your ego—you will have a much better time accepting your losses and, in turn, controlling them.
Formulating a plan can be tricky. First, you’ll need to work out the maximum loss you will tolerate and the maximum gain you can accept for your investment. You also must analyze each and every stock to determine the likelihood of movement in each direction.
Many investors use fundamental or technical analysis. At times they use both, in order to determine the necessary limits for their investing.
What is your personal tolerance for risk? This aspect needs to be looked at carefully. It can depend on a number of factors, including how much time you have, your available capital and your personality. Usually, those who don’t mind risk will have looser boundaries as opposed to those who are risk averse.
Those who don’t mind risk will try and make as much profit as possible from rising stock, whereas more conservative investors may sell the stock prematurely during the rise to eliminate the chance of risk, which could happen if the stocks suddenly decide to plummet.
Once you have decided on a figure, whether aggressive or conservative, put your investing plan into action. The key is to make sure you sell your stocks if they rise to a certain level or if they fall to a certain level, no matter what.
A wise investor uses the stop/loss order. This tells your broker to sell or buy whenever a stock hits a certain price. This will ensure that you don’t get burned on the down market, especially as you won’t be available to watch your stocks all the time.
Once you have your strategy in place, always remember the whole idea of this to make a strict guideline for when to sell. Of course, it hurts when you see a stock begin to soar when you have already sold, but it’s better to sell when the stock is on the way up, rather to frantically sell after it’s peaked and plummeted.