Maybe you remember the days when you or your parents bought a “blue chip” stock like General Motors and held on to the stock for years? General Motors is now off the Board. Hopefully you did not ride this stock into the basement. I know you had people around you telling you or you told yourself, “it will come back up.” Or “I can’t sell it now as it would be a loss” and every day you held on to the stock the value decreased even more.
Or maybe your investment advisor keeps telling you to hold on because you are “in for the long term.” Rather than just hold, be nimble. Buy an investment and watch how it does. If the price drops say 15%, sell that investment. There is no reason to just hold on and pray that it will go back up! Rather, sleep at night…. If it goes down 15% or a max of 20% sell. If it goes back up, go can always buy it again.
Just the simple rule of selling when the investment is down 20% will keep you out of that agonizing emotional state of “will it go back up?” “ Will it continue to go down?” “Maybe I should……” All that emotional investing will make you crazy!
Personally, I invest a max of 10% of my account in one investment and use a maximum of a 20% stop loss on each investment. What are your money management rules? Or what have you learned by not having money management rules?