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Editor's note: This week we've shared classic advice on how to limit risk and maximize gains with stocks near all-time highs. Today, we bring it all home with a recent example of how these strategies saved Steve and his readers from losing a fortune. Since this essay was published in March, Russian stocks have plummeted by more than 30%. But by simply "having a plan," Steve was able to minimize the damage. Read on to learn exactly...
What to Do When Your Stock Is CrashingBy
Friday, December 26, 2014
Right now, one of my stocks is crashing...
What should I do?
What do you do in that situation? You know you will face this situation sometime with one of your stocks, if you haven't faced it already.
Do you hold on and hope it comes back? That doesn't sound like a serious strategy.
Do you panic and bail out? That doesn't sound like a real strategy, either...
So... what should you do?
Having a stock crash on you is part of investing in stocks... It's a risk you take every day that you're invested in the market.
Here's what you need to do...
When a stock you own is crashing, you need to ask yourself two things:
1) Is the reason I bought it still valid?
If you bought a tiny biotech stock because you thought its drug was going to succeed, but it failed, you need to get out... Don't say, "Well, the company has other things cooking, too" or "Well, I've lost SO MUCH already, how much worse can it get?"
Don't catch yourself saying either of those things. If the reason you bought the stock is no longer valid, get out.
2) What is my "point of maximum pain"?
How much are you willing to lose before crying "uncle"?
You should try to define this point when you enter the trade. That way you've made a rational decision to sell in advance, not an emotional decision right at the moment the stock is down.
The stock I'm down on is the Market Vectors Russia Fund (RSX). I'm looking at it through the lens of these two questions...
The basic reason I bought is, Russian stocks are "stupid-cheap." So if things go from "bad to less bad" in Russia, you can make A LOT of money.
Russian stocks are still cheap. But what about No. 2 above – what is my point of maximum pain here?
In my True Wealth newsletter, I set a "trailing stop" of 25% on this trade. That is my point of maximum pain.
If my Russia fund closes below $21.99, we will sell the next day – no "ifs," "ands," or "buts."
RSX is trading around $23 as I write this – so it's getting close to its trailing stop. I will sell if that happens.
The important thing here is, I have a plan. I'm not holding and hoping. I'm not panicking and selling.
I have an exit strategy.
What do you when your stock is crashing? Do you:
Which sounds the smartest to you? Make sure you have an exit strategy in place... Someday, you will be glad you do – guaranteed...
Good investing,
Steve
Further Reading:
"My friend seems to have the worst luck in the market..." writes Amber Lee Mason. "He never knows what to do when a trade turns against him..." Amber says the solution is easy. Find it here: Three Things You MUST Do Before You Make Your Next Trade.
Most people follow the crowd, Dan Ferris says. They only feel comfortable buying when prices are high... and selling when prices are low.
"That's the bottom line on why most people lose money in stocks." Learn how to reverse this dangerous cycle – and what Dan calls "your biggest chance for capital gains in 2015" – right here.
Market NotesAN UPDATE ON AMERICA'S LARGEST BANK Wells Fargo shares continue to soar... and that's more good news for America.
This week, we've shared how the soaring share prices of the world's largest hotel chain and payroll processing giant ADP prove that things in America "can't be all that bad." Contrary to the constant fear-mongering in the mainstream media, the U.S. economy is growing, albeit slowly. The recent share price movement in America's largest bank also supports this notion...
Below, you'll see a three-year chart of Wells Fargo (WFC). With a market cap of around $285 billion, Wells Fargo is America's largest bank. It's also the nation's largest issuer of mortgages. It's very much a "play" on America.
Like almost every financial company, Wells Fargo was hammered in the 2008-2009 credit crisis. But since bottoming in 2009, it has been all recovery for Wells Fargo. The company has "digested" the bad debts of years past, and it's now increasing earnings. Things are going so well that the stock just reached its highest level since 2006. It's yet another sign that the U.S. economy might not be booming... but it's certainly not busting, either.
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