When is it Time to Cut Your Losses?
hello primates.
recently, i've been weighing up whether i should start investing some my spare shekels into some stocks. one aspect that i have been thinking about a lot is how to know when to cut your losses - more specifically, i'm curious to know whether there is a systematic approach that one can follow as opposed to just going by feel or market commentator consensus. for example, could you use a stock's beta to create a sort of rule-of-thumb boundary for a stop-loss?
(inb4 no one knows what's going to happen in the markets, come on)
how would personal risk preferences play into this equation? if i was, say, low-to-medium risk with a preference for mature, income stocks, would it be worth cranking up the risk a little when investing in growth stocks as a minority of the portfolio?
my background is in mostly corporate finance and economics, so i don't really know the first thing about (serious) portfolio management. would appreciate it if one (or more) of you - particularly any of the filthy apes that work in equities/equity research - could enlighten me.
Hi IRRection, any of these threads helpful:
If those topics were completely useless, don't blame me, blame my programmers...
bump
Effectively I understand your question as to how do you define a downward trend? As you want to sell your stock once it enters a downward trend.
There are entire companies built on this. I'd look into research by AQR or similar firms. However, I think the two simplest and most robust methods are if it crosses below its 200-day moving average or the trailing 1-year return is negative.
i have seen this kind of stuff employed by traders - did some s&t courses when i was at uni. i'm sure the answer to this question is highly dependent on firm/sector/region, but do such metrics actually work consistently often that they provide a safety net?
Historically, this methodology works across regions and assets. However, the question is, will it continue to work going forward, and I don't know the answer to that.
My personal opinion is that it won't increase returns, but it should reduce overall portfolio volatility.
I'm speaking from the perspective of someone who would ideally never sell, but sometimes your thesis goes against you/timing is off. here's what I do personally and professionally.
if I were in your shoes though, I'd just buy a broad market ETF/mutual fund and be done with it. your performance will be comparable and your stress will be lower.
i think you're probably right about going passive. i've heard all the arguments, and they're compelling, but it just doesn't seem as exciting, does it?
that said, i'd prefer a boring investment to simply throwing cash away for thrills.
it's totally fine to have a play portfolio adjacent to your core portfolio, that's fine, I'm just telling you what I know works.
if you want to build wealth and just want to be long only, you're better off doing something passive (either index or not) unless it's your job and you're good at it.
this is common, you want to do something like day trading because it's exciting, when you're really dealing with something a little more serious than a hobby. sure, take some risk, gamble with 10-20% of your portfolio, but the core of your strategy should be passively oriented.
besides, aren't their other things you can do for fun? I love investing, it's what I do for a living, but it ain't that fun when compared to travel, sports, sex, drugs, music, etc.
Never. It’s not a loss until you sell, so just never sell stock and you’ll never lose money.
fucken genius, why didn't i think of this before
You have to decide are you going to take more a fundamental approach or a technical approach. If fundamental, you have to determine if your thesis is still intact. For example, look at Apple today with the coronavirus news and cutting forecast, that's not a thing that busts the thesis on AAPL. Something like saying they would get out making phones would be.
Technical is all about patterns, and how the stock is reacting.
DCA into an index fund. Hold forever. Don't try to time the market.
Don’t do straight passive it’s for people not smart enough to make returns. Use the moving averages as well as follow the news. Follow the trend it’s usually rather obvious where it’s going on a larger time frame. I was long then once the virus came out sold nearly everything , now sitting on mostly cash waiting for the trend to change again. Follow the fed and news, averages, standard deviations away from averages . Many things are useful
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