I just found a great article titled “ Limitting losses to 8% still no. 1 Investing Rule” I don’t know does this rule works or not or is it really no. 1 investing rule for us. But I think it does worth to read the idea in the article.

Here is the article :

“Limiting Losses To 8% Still No. 1 Investing Rule
BY CRAIG SHAW
INVESTOR’S BUSINESS DAILY

After the worst bear market in the post-World War II era, a lot of investors’portfolios are in tatters.

Retirements have been postponed, vacations canceled, college plans scaled back. Yet anyone could have avoided that kind of life-changing damage by following one simple rule of investing.

You didn’t need to know how to read a company’s financial statement. You didn’t need to understand chart technicalities like stochastics or moving averages. You didn’t need to even watch the action of the major market indexes.

You just need to understand this sentence: Cut losses at 7% or 8%.

If you sold every stock you bought once it fell 7% or 8% from your purchase price, your nest egg probably stayed intact. You might not have made much money in the past 2 1/2 years, but you likely didn’t lose a lot either.

The Nasdaq is 77% off its March 2000 peak (see chart). Many stocks have lost 80%, 90% or more. In that climate, it’s better to stay out of the market altogether. But if you do trade, cutting losses ensures your portfolio doesn’t mimic the indexes’downturn.

It doesn’t matter if a stock has glowing fundamentals, a seductive story or hit product. If it falls 7% or 8% from your buy price, sell it. No exception, no excuses.

You may feel silly if the decline was a mere hiccup and the stock goes on to post gains. But no one can predict the future. The stock could just as easily have crashed 30%, 50% or more. Cutting losses is an insurance policy that protects you from ever sustaining that kind of damage.

It takes 10 7% losses to cut your portfolio in half. That means you can make 10 bad trades in a row and still keep half your money - as long as you cut losses. After two or three bum trades, it’s best to pause and study the market. It may be time to stay out.

But if you fail to cut your falling stock loose, hoping it will recover, you could take that big a hit on a single stock. In this kind of market, it can happen in days.

Larger losses are much harder to recoup as well. Lose 7% on a stock and you need to gain only 7.5% on your next buy to break even. But a 25% loss requires a 33% gain. Let a stock drop 50% and you’ll need a 100% winner to recover. How many stocks have doubled in this crushing bear?

It may seem unlikely now, but sooner or later a bull market will rear its head. Keeping losses small means you’ll have the capital to take part when the market turns.”

Some words from me

Does 7-8% of stop loss is enough for investment like stocks? What do you think?

Source : Richdad.com

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