What to do When an Investment Goes Bad…

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Dear FutureMoneyTrends.com Member,

A for-sure deal, a slam dunker, or as my old loan broker used to tell me, “Dan, this is a no-brainer.” These are the type of phrases that are usually expressed before one loses most or all of their capital in an investment.

Oftentimes we get so excited about the prospects of making money we forget that with any investment, no matter what it is, there is always some risk. Even a savings account, which nominally may not change, can be dramatically reduced by inflation. You just can’t escape the volatility of asset prices changing. The best you can do is find good value, buying assets when they are cheap.

One of the binds that investors often find themselves in is having trouble selling a bad investment, or even a good investment that has turned into a real loser either due to a bear market or an irrational market. It was Keynes, an economist I am no fan of, who said, “the markets can stay irrational longer than I can stay solvent.” Who here reading this can relate to that?

Here are 3 Core Disciplines
That I Think You Can and Should Apply to All of Your Investments

#1 Trailing Stop Loss

We’ve discussed this many times before. Having a trailing stop loss is something that should be set for all of your publicly held investments. Even if it’s just a mental one for those lower volume trades, you have to become disciplined about selling your losers and letting your winners ride. Too often do investors watch a stock fall 90 to 100%.

Everyone knows the feeling. You say to yourself, “well, as soon as this thing rises back up to a break even, I’m selling.” The trouble with this is that stocks tend to rise slower than when they crash. A 50% decline can happen in a week, but in order to break even, you now need to see a 100% increase in the current price.

Prior to entering an investment, limit your losses by setting up a stop loss. For short term trades I use anything from 5 to 15%. And for a longer term investment, my personal stop losses range from 25 to 33%.

#2 Change Course

Change course. I’ve heard countless stories from investors who would love to jump into real estate, a business, or the stock market, but they can’t until one of their loser investments turns around.

Rick Rule told me that one of the most important lessons you can learn is to not let the bad decisions of the past ruin great decisions you can make today. What this means is don’t be afraid to sell a bad investment idea in order to reallocate the capital to a new idea that you think has more opportunity. You have to forget about those losses, and just move on.

When I decided to live a more youthful retirement lifestyle, I had to sell 100% of my speculative investments — many of which were down — in order to buy rental properties that offered up a consistent cash flow to my family’s income. In 2009, after gold had fallen, I sold some in order to buy more silver. Silver had fallen as well, but at the time it was a better value than gold.

#3 Ask Yourself This: Would I Buy this Investment Today?

If the answer is no, then sell it.Let’s say you had $50,000 in a single stock position, and then it dropped to $20,000. If you had $20,000 in the bank, would you use it to buy that stock? If the answer is no, then sell it. Don’t torture yourself over the money lost; you can’t do anything about that, you can only move forward. The only thing that you should be reflecting on is whether you want to have your capital invested in that stock or somewhere else as of right now.

An Added Protection

Position sizing is an added protection. Limit individual stocks to 5% of your portfolio. Depending on your age, restrict certain assets to 10-20-or-30% of your net worth. A stock that is 5% of your portfolio that drops 20% is only a 2% drop for your entire brokerage account.

If your assets are divided up by 4 (25% each) between stocks, real estate, business, and cash, a 50% decline in the stock market is only a drop of 12.5% drop in your overall net worth. Protecting capital should be your top concern with all of your investments. Never lose sight of protecting what you already have.

Kind Regards,
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Daniel Ameduri
President, FutureMoneyTrends.com

Weekly Wealth Digest Video Episode 41

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