It looks like we have now entered a new bull phase in the stock market and I have a question for you. Will you give back the profits that you make this time as you did in 2000? You sure dont want to, but you are not going to get any help from your broker. The investors (Not really the right term. They were gamblers.) had bought stocks and mutual funds during the 90s and seen them have huge advances. They thought they were going to retire early, buy an island in the Caribbean and drink rum and coke all day with no hassels. All of a sudden the bull was attacked and eaten by a grizzly bear. Dreams of comfortable early retirement went up in smoke as the bull was barbequed. We saw the technology stocks and many mutual funds lose about 80% of their value. Many people did not want to open their monthly brokerage statements and I couldnt blame them. Were there any way those losses could have been avoided? You betcha, but you wont hear that from your broker. There is what I call portfolio insurance. It doesnt cost any thing and anyone can have it at no charge. Brokerage companies dont want you to use it much less even find out about it. It is a way of protecting your cash from being eaten by that nasty bear. While the market is going up you dont even think about any financial calamity, but history has shown as far back as you want to look that the stock market goes up and it also goes DOWN. Over long periods of time it does increase at about 6% per year (including dividends and the inflation factor). During the 90s everyone was a financial genius and saw their accounts going up about 12% per year or more. That is not a sustainable pattern. Those periods do occur and are followed by years of declining prices. You dont want to own stock then, do you? What you have to decide is how much are you willing to give up before you decide to sell. How much of your money are you willing to risk from here where you are right now. Is it 2%, 5%, 10%, 20% or more? In 2000 we saw $200 stocks go down to $5.00. You sure dont want to take that ride again. After you make your decision you call your broker and tell (not ask) him you want to place a trailing stop loss order of 7% (whatever) on your position. Most assuredly he will try to talk you out of doing it. That 7% (?) is your insurance that you wont have to sit through a 20%, 40% or more down draught. He will not watch your account. That is your money not his. If you care about it you are the only one who will watch it. Place your open stop-loss order and keep your profits. |
