Rule #5 – Know When to Hold’em, Know When to Fold’em
Avoid falling in love with any one particular stock as the market can turn on it very quickly. While you may love a particular stock, millions of others may develop a dislike on a moment’s notice. You must be prepared to cut ties with an investment when as this condition starts to emerge. This brings us to the only exception to Rule #1.
- Exception – Market Tops: As you become more experienced, you’ll get a “feel” for those times when one of your winners is at a “market top.” As you watch stocks day after day and month after month, you will get the feel that a stock has gone too far too fast and it just has to come back down a bit. This is the time to consider just selling your winners (or tightening up your stop-loss order to 4%) so you can increase your cash holdings so that you can find another stock that’s on the way up.
As you can see, your possible first reaction (sell the winner and keep the loser), for reasons that have been proven over time, is typically the wrong one. Remember, your winners deliver profit “on paper,” but your losers involve real money you’ve already invested. It’s critical that you cut (minimize) your losses to safeguard your overall portfolio value. For this reason, you should develop effective exit strategies.