Know your limits when investing

Whether you are investing in property, stocks and shares or some other kind of commodity, you need to know your limits. Investment markets are littered with individuals and companies who overstretched their finances and got themselves into serious trouble. It can be easy to convince yourself that the sun will shine forever and a day and your investment will continue to rise. However, nothing ever last forever and there could be an economic crisis just around the corner as we saw in 2008.

Hedging your bets

It is no coincidence that successful investors tend to make good use of stop loss limits as successful shares continue to rise in value. While some investors simply sit back and pat themselves on the back, making no active move to lock in a profit, others will move their stop loss limits higher as the share price moves. Some of the more successful investors of times gone by have taken the approach of selling enough shares after a significant rise to recoup their original investment. This leaves them with “free shares” which effectively cost them nothing.

Know your limits when investing
Don’t over stretch!

Can you imagine having a portfolio of free shares taking in companies such as Google and others which have multiplied in value over the years? It sounds good, it sounds fairly easy and it is certainly sensible, but it is easier said than done.

Cash flow is king

They say you should only invest with funds which you do not need in the short to medium term and in a perfect world this is right. The chances are that if you ever need to pull money out of the market at relatively short notice your investments will be underperforming and you may need to take a loss on some of them. This is just the way things work when you need to sell something desperately – it can often be difficult to obtain the best price.

If on the other hand you invest with funds that will not be required in the short to medium term then this give you some breathing space and reduces the pressure. Even though some investors will tell you they “love pressure”, too much pressure can warp your thinking and see you make the wrong decisions.

Don’t be greedy

If you look back at the technology boom at the turn-of-the-century many investors multiplied their money numerous times over. We saw paper millionaires, companies floated with skyhigh valuations and unfortunately many people overstretched themselves and overexposed themselves to the technology sector. When the collapse came it was swift, brutal and many people lost everything. When the markets were flying high, loans, credit cards and other high risk funding opportunities were brought into play.

As Lord Goldsmith once said “the reason I am so rich is because I always sold too early” – something which many investors should heed in the good times. Know your limits, don’t overstretch your funding and do not put yourself in a situation where you may need to sell at short notice if cash flow is difficult. It can be tricky balancing a profitable investment against reducing your risk and exposure but, then again, is this not the perfect situation we all want to be in? Assuming that you make the most of it….

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