“Investors spend most of their time deciding what stock to buy. They spend little if any time thinking about when and under what circumstances their stock should be sold. This is a serious mistake.”
William O’Neil, founder of Investor’s Business Daily
Whether you’re investing for yourself or for clients, knowing when to sell is as important as knowing when to buy.
Today’s market is an ideal example of why this is so. Many investors feel like they are reliving the stock market decline that took place from the spring of 2000 through 2002, when investment portfolios declined by an average of 40 percent or more.
Yet many investors are living in denial. They won’t look at their investment statements, because they fear their hard-earned life’s savings has been cut in half.
If you’re one of those investors, it’s time to face reality and to understand how you got here in the first place. Unless you make it a point to learn what went wrong and why, history is likely to repeat itself.
Most people, both investors and advisors, got hurt by the 2000 to 2002 downturn because they either never learned or failed to practice sound investment rules and principles. Because the ’90s provided one of the longest bull markets in history, many investors perceived investing in the stock market as a sure thing. To lose heavily was unheard of; all you had to do was buy technology stocks on every dip, because they always came back and increased in price.
Investors didn’t grasp the realities of market risk or how to guard against major losses. They didn’t have any way of knowing if the market was headed up or turning down. Worst of all, they didn’t have any sell rules!
Today, we all know investing in the stock market can be hazardous to your wealth. We have witnessed two vicious bear markets in this decade alone. Investors were recently down 50 percent as a result of the current bear market, which means they need a 100 percent return just to break even.
It took 6.8 years for investors invested in the S&P 500 to break even from the last bear market. Investors heavily invested in NASDAQ stocks during 2000 through 2002 never made it back to break even and they are being hit by another bear market.
Investors can save themselves a great deal of money by adopting one simple rule from William O’Neil, who wrote many books on how to invest successfully.
His number one rule is to cut your losses short to prevent much greater losses. He suggests that if a stock falls 8 percent below your purchase price, sell it. While an 8 percent decline isn’t enjoyable, it’s a lot easier to make up an 8 percent loss than it is to make up a 50 percent decline.
By incorporating this one rule, your investment portfolio will recover from losses a lot sooner and you’ll minimize the pain of worrying about your future retirement.