Building Wealth Every great athlete has one thing in common...
They hate to lose – more than anything else in the world.
Take Davante Adams. Adams was once the star wide receiver for the Green Bay Packers, catching passes from the great Aaron Rodgers. (Adams now plays for the Las Vegas Raiders.)
In a recent podcast, Adams was asked about the day he was drafted into the NFL. Most folks would look back at that day and reminisce about the incredible achievement. But not Adams.
He was instead focused on the eight wide receivers drafted before him. He named all eight players and their correct order in the draft off the top of his head.
He didn't consider it a win that he was drafted and was paid a small fortune. Instead, it was a loss that other guys were picked before him. And he hated that feeling of losing.
Investors and traders are no different. The losses that we take hurt much more than the good feeling a win will bring.
This is what's known as "loss aversion."
We've all held a stock that's headed down. And we've all – at some point or another – kept holding, hoping to break even. "If it could just get back to my buy price, I would sell and move on."
That whole time, you've got your capital tied up in a stock that the market has soured on. Meanwhile, other stocks are shooting up left and right.
Believe me, the dollars you earn by "getting even" are no more valuable than the dollars you'd earn by switching to the stock of a better business.
You should cut your losses and move on... But many investors simply can't do that. They become emotional with stocks that turn into losers.
It's not just you. It's built into our brains. And it's hard to let go.
In a study by Terrance Odean of the University of California, Davis, an analysis of 10,000 individual brokerage accounts found that investors held losing stocks for a median of 124 days versus a median of 102 days for winning stocks.
We're too quick to sell winners lest we give back some of our gains. And it costs us money.
Good investors have to stay rational in the face of a down stock... But we're humans first, investors second. We simply can't be trusted to keep our emotions in check.
This is why you need to have an exit plan in place every time you buy a stock. My team and I typically use a 25% hard stop for stocks that we want to own for a long time.
All a 25% hard stop means is that if the stocks fall 25% below your purchase price, you sell. No questions asked.
For example, if we buy a stock at $10, we'd sell that stock if it fell below $7.50. That limits our loss to 25%.
There are more intricate ways to limit your losses... You can use a "trailing stop," which adjusts higher as the stock price rises.
Today, I see the need to have an exit plan in place for your portfolio. I've previously written about how nervous I've become for a big pullback in the market. Having a stop loss in place will help limit the hurt when the downturn finally arrives.
Stansberry Research founder Porter Stansberry is also sounding the alarm. He recently wrote that it's clear America is heading off a financial cliff.
Yesterday, Porter went live with an urgent broadcast. He says you shouldn't panic, but he's certain it's time to make a big change to how you manage you stock investments...
In fact, Porter says it may be the only way to hold on to the gains you've made during this bull market.
If you haven't watched yet, click here to do so now.
What We're Reading...
- Something different: Timing, luck, or talent – what makes a billionaire?
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
July 31, 2024