One major importance while investing (including professionals) is cutting your losses early and before your in the whole complete. One problem can be not spending enough time to research and critically thinking through investments risks. To many times I see people spending all kinds of time of planning for the winning stock thats going to hit a grand slam for them. But they don't even think once about how or what percentage do we sell and take our losses or winnings.
The Factors that Really Drive Investors
People really are inconsistent in the thinking of investment risks. People think this is just a given with all the information out there...and you just have to find the low investment risks and find the highest return. Though, our studies show us something completely different.
Though, it's the way you view and look at things is a major key in this investing ideas of cutting your losses early. You must really start thinking about or driven by is it actually investing risk? Though, through our finding we have came to understand it's actually the loss. So now, your asking well what's the difference? Great questions and let us answer this question.
Here is an good example, you have to investment choices:
* Scenerio one: 80% potential of winning $4,000 versus a 20% potential of earning nothing
* Scenerio two: 100% potential of receiving $3,000.
Now to many this is a no brainer right of what you would choose? While the scenerio one is pontentially the better investment (with a pontential "expectation" of $3,200), 80% of people choose the scenerio two the 100% money. This means, they aren't willing to risk a small investment profit for a potentially bigger one.
Now let's look at the investment scenerios from a loss perspective, with the same scenerios:
* 80% pontential of losing $4,000 versus a 20% chance of breaking even, or
* 100% pontential of losing $3,000.
Now look at this closely, believe or not over 92% of people choose the first scenerio. They are willing to take this investment. This means, that 92% of the people will do just about anything to avoid an investment loss. When the investments involve losing money, 92% of us are risk-seekers, not risk reluctant.
Now we hope we have opened some eyes with this little example and investment scenerio. Also we hope to show you that a lot of us are not as consistent in our thinking in considering investment risks. And this kind of thinking can really come back to hurt you in your investments.
Investing lossess cut early...remember a major key or the golden rule
A major key or golden rule on investing is to "cut your losses early, short, and let your winners ride." Almost every successful investor in the world has his discipline and sticks by this rule - however, please not as well there are very few successful investors who regularly beat the markets. For the rest of us average joes (about 99% of investors) following this major key or golden rule seems too difficult. Look at what Peter Bernstein says in Against the Gods: The Remarkable Story of Risk, "It is not so much that people hate uncertainty - but rather, they hate losing... A loss taken is an acknowledgement of error." That says it better then we could.
It's major key or golden rule is not just for the stock market. It's in all of life. Check out this example of investment risk, from Peter Bernstein...
* "Imagine that a rare disease is breaking out and is expected to kill 600 people. Two different programs are available to deal with the threat. If Program A is adopted, 200 people will be saved. If Program B is adopted there is a 33% probability that everyone will be saved and a 67% probability that no one will be saved.
* "Which program would you choose? If most of us are risk-averse, rational people will prefer Plan A's certainty of saving 200 lives over Plan B's gamble, which has the same mathematical expectancy but involves taking the risk of a 67% chance that everyone will die. [When given the choice], 72% of people chose the risk-averse response represented by Program A."
* "Now consider the identical problem posed differently. If Program C is adopted, 400 of the 600 people will die, while Program D entails a 33% probability that no one will die and a 67% probability that 600 people will die. Note that the first of the two choices is now expressed as 400 deaths rather than 200 survivors, while the second program offers a 33% chance that no one will die. ...78% of people quizzed were risk seekers and opted for the gamble: they could not tolerate the prospect of the sure loss of 400 lives."
Why Avoiding Hugh Investment Losses Is Key to Your Strategy
We, as investors, have to understand that we are not always going to know it all. What we are going to lose or gain. We need to be in the position whereby we are avoiding investment losses as much as possible. However, first, if we are to succeed in investing and stock market, we must learn to take cut our investment losses early. And this is because a small loss can't be allowed to become a BIG loss.
Smart investors come to understand the need to go against what most of the time feels natural. And that means learning to cut investment losses early, and learning to let winners ride. Put simply, the way you make money is to combine a few small losses with big winners.
In order to win the war on the street, you've got to learn to cut your losses. You need to man up and admit you're wrong.. That means recognizing the potential nature of human instinct and cut investment losses. And it means cutting your investment losses early before they can become big losses. It's never to late to start good discipline, especially in the investing!
Happy Holiday Investing!!
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