The Art of Cutting Losses At The Right Time

You can make money from the stock market in two ways: by increasing gains or by cutting your losses. Most investors focus only on the former part, and no importance is given to avoid losses in the share market. 

The top rule for every stock market investor is to cut your losses short and let your winners run. Today, we will talk about the art of cutting losses at the right time.

Understanding losses

We will talk about the basics in this section. But every investor must understand it before investing. Assume you incur a loss of 50% on your investment. How many gains do you need to make to recover your capital? Your stock must rise 100% from the current level so you can recover your money.

If you have to spend time in the market, stocks don't increase 100% after falling easily. Even if they do, it takes time. Every investor must look at losses from this angle. 

Why cut losses & sell holdings that are in losses?

For simplicity purposes, assume you have only three stocks in your portfolio - Stock A, B, and C. Assume there is some negative news around stock A. As a result, the stock price starts to go down. The stock goes down 50%. Not only this, but since the business is impacted, the stock may not rise anytime soon. Do you think it is a good position to be in as an investor?

If you hold such stocks, your portfolio will never deliver good returns as you lose an opportunity to gain. Assume that stock A has fallen 50% and stays at that level for a year. The other two stocks have increased by 20% in the same period. 

If you had sold your investment once the fall started (at a 20% loss) and reinvested the remaining 8,000 in stocks A and B equally, you would have at least recovered your capital.

Based on the above discussion, we can say there are two parts to cut losses:

• Selling stocks as soon as a red alert arises - at the right time
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• Selling a beaten stock and reinvesting the amount in some better stocks

The art of cutting losses at the right time

Today, we will focus on cutting losses at the right time before significant damage happens. Below are a few things to work on to learn the art of cutting losses:

Be on top of your game: You need to track all your stocks continuously and see the news. Recently, we have seen how a single report caused a downfall in a group of stocks. As an investor, you should be in the game all the time. It is not easy. Not everyone has the time or the expertise to be in the market and understand every news impact. There is a stock alert app that will tell you to exit your position as soon as the red alert is flagged. You can opt for such options.

Control your emotions: When the share price goes down, your heart tells you that the price will bounce back, as you cannot make a wrong investment. You may have other similar thoughts, which can lead to holding the falling stock or delaying pressing the sell button. Investing is a mental game. You have to master it to cut your losses and maximize your gains.

Don't let a small mistake become a disaster: No matter how many years you have spent in the market, you will always pick the wrong stocks at some point. Investors (and traders) are expected to make mistakes. You should be ready to acknowledge your small mistake before it becomes a disaster.  

Conclusion

As an investor, you should focus on increasing your gains and cutting your losses. Once you can master this challenging art, you will see your portfolio's color changing to green with time. If you don't have the expertise, you can use a technology-driven app that sends alerts at the right time.