What criteria do you all use to decide when to cut your losses? I Have read and heard a few times that a lot of people simply set up a % loss before they jump ship, but it seems to me that there should be more details involved before taking such a cut. For instance, why did it take such a big hit? What liklihood will it come back within a reasonable amount of time etc? What are more specific things you look for?
I try to keep a hard limit on losses to where if investments don't go as I thought they would, I try to limit the losses and make as much back as I can on the original investment. That can be done in some investments, but not in all of them. So if I have to face that, then I try to boost or rely on one of the better arrangements that gave a higher amount back to see if I can balance the books with it. You always wanna see the big picture before you invest too much. If you're going to invest more than you can afford to lose, then that's when your portfolio and finances are in trouble. If you can keep a handle on how much you have to invest, and know how to overcome how much you might lose if you don't get the yield from a stock or other investment going up, you don't risk losing as much and if a stock tanks it's not as bad as if you had to rely on it to get by and keep going. What's that old saying? Never put all your eggs in one basket. I watch a stock for months at a time to see how far it goes in any direction, and for how long. I have to give a stock at least as long as it took to change when I observed it moving either direction. If I don't, I'm being preemptive and will lose money on it that will go to other people if I'm not on top of my agenda for long term investing with it.
The best time to cut your losses IMHO, would be when you are sure a company's growth has hit it's peak and the inevitable decline has began. Since there's no hope for such a company, as soon as the stocks start falling you'd have to sell even if it means making a loss because if you wait too long you might lose a lot more.
For us, we jump ship at the first sign of a leak. We have learned that lesson when we bought the stocks of Piltel, the carrier of the largest pager in our country. We didn't realize that it would be eclipsed by the cellphone. So when the cellphone got popular, the value of our stocks was going down and in a few months it slid from 20 down to 0.50. It was a big disaster because we didn't think that it would crash that fast. When the price was down to 18 we thought all along that it will stabilize and would bounce back to the 20 level. But it did not. So it's a good rule to quit while you are ahead.
Well I am pretty sure that if any of us knew the answer the that one then we would probably be significantly more well off than current circumstances, but then again I cannot speak for anyone but myself. It is so hard as an investor not to want to ride out our investment, and of course we all know the feeling of "I know once I sell the price will go up". I would say the best thing that you can do is to do your research.
People have different criteria as to when to cut their losses, and ideally you don't incur any loss at all, but that is something that we aren't going to be able to do all of the time. The markets can be unpredictable, even with the best of planning, so if you do have to pull out and make a small loss, bite the bullet and do it, don't hang on and hope you recover, but a lot of the time you won't, and end up losing more in the long run.
If you are talking about short term trading then yes, I have a stop loss set up so that at a predetermined price it will sell. This is simply to cover my own ass and to never lose more than I'm ready to lose. In the long term side of things, it really doesn't matter if a stock is winning or losing. The past doesn't matter, only the future. If I own stock A and I do not own stock B, yet I determine that according to my estimates stock B will do better in the future... well then, assuming I don't have any cash lying around, I sell A and buy B. Even if I do have extra cash, it's still time to re-evaluate where stock A is and how likely is it to keep going up or down. Doesn't matter if it's up by 50% or down by 50% from when I bought, if the future looks good then it's time to hold / add more and if the future looks bad then it's time to sell.
It depends on one's financial outlook. For example if one does not have a diversified portfolio or other sources of income and then keep absorbing losses, it would be prudent to jump ship until such a time when you can afford to risk. Another reason could be a strategic withdrawal from the stock market in order to cut losses and absorb the impact of loss as you study and plot for a comeback using the lessons learnt. The funny thing with the stock market is that you might jump ship just when things are decidedly heading north.
Depending on the stocks you invest in, I like to think many are driven by market sentiment more-so than fundamentals. It's important to really gauge the market beyond just seeing numbers going up and down -- is your stock injured and licking its wounds, but healing or is what's going on likely a wide open wound that will likely bleed out for awhile. Oil stocks in the two years or so would be an example of something that was just bleeding out and some people bought in way too early under the assumption that it would bounce back, only to find themselves caught in the undertow and dragged further down. When it comes to having an entry point, sometimes it's wiser to leave money on the table and just patiently observe market sentiment as a stock begins to rise -- get a feel for it, what people are saying, volatility, and what have you. What happens when it has a hiccup? Decide from there whether to move in or not. It's sort of the same in reverse when it comes to cutting your loses, but I suppose there's a greater sense of urgency when you start watching your money disappear before you.
