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Investing with Trailing Stops How to Protect Your Portfolio from Plummeting Stock Prices
Investing sometimes feels as counter intuitive as that perfect drive you some how luck into when there are only two holes left to play. But the two endeavors have two very important keys in common if you are to be successful at either: Minimize your errors and maximize the things you do right. In golf, hitting balls into lakes or beyond the out-of-bounds markers are akin to sitting idly by as your stocks drop to zero. Very few portfolios can weather catastrophic losses and still provide attractive overall returns. You’ll hear some brokers, fund managers, and analysts proclaim that they just aim to be right 51% of the time. That might work out for them…as long as the 49% of the time they’re wrong doesn’t bankrupt them (or you)… In investing — or in most other things in life — it’s not about how often you’re right or wrong, but by how much. The magnitude of your triumphs and defeats are of paramount importance. Michael Mauboussin, chief investment strategist at Legg Mason Capital Markets, calls this the “Babe Ruth Effect.” In his book More Than You Know, Mauboussin says that Ruth was one of baseball’s greatest hitters, as we all know, despite the fact that he did strike out a lot. He magnified his triumphs, however, by hitting 714 homeruns. Minimizing the magnitude of your mistakes within your own portfolio, and allowing your winners to dominate your results, is easier to achieve than you might think. In fact, it can be an almost automated process… ************************* The Average Top-Tier Stock in This “Secret Market” Gained 25,498% in Six Months All of these stocks had to be completely ignored by Wall Street. In this report, you will find out about nine of these amazing stories. It also gives you the chance to find out about four more companies that are expecting the same thing. But you have to hurry — the special price in the offer won’t last long. Find out how you can be an insider in this “secret market.” ************************* I’m talking about trailing stops — the emotionless selling of stocks in your portfolio when they drop a predetermined percentage from their highs. Why, you might ask, should I be worried about trailing stops as U.S markets are setting new record highs each day? Well, not all stocks participate in rising markets, and you may encounter a trailing stop trigger on stocks that have already risen substantially. Let me explain… By placing, say, a 25% trailing stop on each stock in your portfolio and only allowing yourself to invest a maximum of 4% in any one stock, you are limiting yourself to a maximum loss of only 1% of your investment capital for each stock that stops out. That’s pretty good protection. Several 1% losses, while nothing to jump up and celebrate, are acceptable as you allow your winning positions to climb. Below is an example of exactly what I’m describing…
Above is a worst-case scenario. You have a few winning positions and many more losers that plummet the moment you buy them. The portfolio illustrates that if you limit your position sizes to a maximum of 4% of you investment capital (here we assume that to be $100,000), and use trailing stops on all of your stocks, you can actually have a lot more losers in your portfolio than winners and still make money. In fact, this portfolio contains only 40% of stocks that actually rose compared to 60% that stopped out. Despite that, the portfolio is up 7.02%. I know your next comment: “But Craig, those fictitious winners are up unrealistically high.” Well, I actually chose those positive returns from actual results in the Small-Cap Strategy Report’s recommended list. The only difference between that list and the above portfolio is that we’ve been right more often. In fact, Since the beginning of 2006, our recommendations have ended up rising 65% of the time, and the average returns of those gainers has been 35.37%. Until next time, P.S.: Right now is an exciting time to get in on these kinds of steady gains. With a few brand new picks less than a week old, now is your chance to see fast profits. To find out about these scientifically selected penny stocks, read this special report. |
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Craig has spent the last ten years entrenched in the investment industry and doing what he loves best: performing financial research on scores of companies and writing about compelling investments... <click here for full bio> |
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