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So, stocks have been going down pretty much all year, sans last month (in July, the S&P was up 9.11%). In June, stocks hit their worst, with the S&P crossing into bear market territory. That's when the pundits were at their loudest, telling everyone to sell their stocks. Right at the bottom. But since June's bottom, the S&P has soared 12.6% thru July. Had you sold, you'd be down at least -23.6% (that was when the S&P put in its lowest close on June 16th.) I say 'at least' because many stocks fell far more than that. You also would've missed out on the double-digit gains that we've seen since then. Granted, the S&P is still down by -13.9% from its all-time high close. But that's a far cry from being down nearly -24%. In fact, it's 41% less. For those who went a step further and shorted the market at the lows, not only would you have been down the -23.6% that the S&P temporarily shed in the first half, but you'd be down an extra -12.6% for being short while the market then went back up. All in all, you'd be down more than -33%. Getting out after such a big decline, probably felt safe (as uncomfortable as it might have been). And getting short after such a big decline might have sounded smart (not to mention exciting, as any revenge trade does). But then you would likely have found yourself rooting for the market to go down, even while it was going back up. And that new bias would have clouded your judgement to objectively look at the market and find promising stocks ready to head higher. It's a classic mistake so many traders and investors make. But it doesn't have to be that way. And if you found yourself selling at the lows, or worse, shorting at the lows, you can correct that mistake. Tit-For-Tat Of course, selling at the lows is just as much in hindsight as buying at the lows, because you don't know they are the lows until after the fact. Same goes for selling at the highs. Nobody does that except by accident. But that doesn't mean you are powerless to do anything in the market when things start heading south. That's when smart money management comes into play. For me, I typically get rid of a stock once it's down -10%. Why ten percent? Because it's kind of like a tit-for-tat. If I lose -10% on a trade, I only need to make a little bit more than 10% (11.1%) on my next trade to get that money back. But if you lost -20% on a trade, you'll need a 25% gain to get that money back. At -30%, you'll need to make 43%. And if you lose -50% on a trade, you'll need a 100% gain on your next trade just to break even. And if picking up a 100% winner was so easy, why did you just get clobbered for a -50% loss? In the first half of this year, there were over 1,690 companies down by -50% or more. That's why I like to keep my losses small. So, I'll typically sell if a stock falls -10% below my purchase price. And I'll oftentimes open that up to a -15% to -20% pullback from their highs if I have a large profit. This is how you can mitigate your losses, and lock in profits, when the market starts going against you. As the market went lower, I found myself getting 'stopped out' on numerous positions, locking in my profits and taking small losses. And as the market continued to fall, I found myself losing less than the market because I was cutting my losses and pulling profits in individual stocks along the way. Of course, I don't like selling stocks at a loss. But I can honestly say that I feel empowered when I do because I'm able to effortlessly make a decision that most people struggle with. And nothing can ruin your portfolio quicker than a big loss, or a series of big losses. More. . . | ||||
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| Bigger And Better Things Another benefit of cutting losses short, is that it can help you stay focused on finding top stocks. Mounting losses will not only crowd out new opportunities for better stocks, but it will also make you gun shy on future trades. By the way, once you get out of a stock, that doesn't mean you can't ever get back in. Of course you can. But don't get back in the moment it goes one tick above where you got out. Make it prove itself first. And make sure it meets all of your buy requirements in order to do so. That also doesn't mean you can't go short on occasion. But treat it like any other stock. And once it goes against you by x amount (such as -10%), pull the plug so you don't do any real damage to your account. But whether it's a bull market, or a bear market (like we're still in now), you should always be scanning for new stocks to get into. When the market is falling, and economic conditions weaken, there will be fewer stocks making the grade. That's just the way it is. But there will always be stocks rising to the top. And savvy investors who diligently stay engaged in the market, even when times are tougher, will find those gems when others have given up. And since you are doing this regularly, you won't miss out when the market turns around. In hindsight, we now know the market bottomed on June 16th. That was not obvious 1 day later on June 17th. Nor was that obvious a week later. But as time went by and the market rallied off its lows, it became more and more obvious that we just saw the bottom, at least for the short-term. And if you are always scanning for new stocks with a high probability of success, you will inevitably find yourself in some spectacular picks at precisely the right time. Between the low close on June 16th and the end of July, there were 4,303 stocks up by 10% or more, 1,730 stocks up by 20% or more, and 349 stocks up by 50% or more. Imagine cutting your losses at -10% and exchanging many of them for winners of 10%, 20%, 50% or greater. Of course, they won't all be winners. Especially if you're still picking stocks as the broader market is falling. You may get into a new stock that goes down. But that's OK, because you're getting out if it goes down -10%. But plenty will be winners. Even when the market was falling, there were hundreds of stocks up 10%, 20%, even 50% or more. And there's nothing magical about that either. Simply by cutting your losses short, and consistently looking for new stocks to get into, you'll find yourself in winners like that. Increasing Your Odds Of Success That's not to say picking winning stocks doesn't require skill. Because it does. If you keep looking at the wrong things to pick stocks with, you'll rarely if ever get into the winners. But picking winning stocks is easier than you think. For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 28 of the last 34 years with an average annual return of 25% per year? That's more than 2 x the S&P with an annual win ratio of more than 82%. That includes 3 bear markets and 4 recessions. And did you know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true! Those two things will give any investor a huge probability of success and put you well on your way to beating the market. But you still have to narrow that list down to the handful of stocks you can buy at any one time. And that's where the professional expertise of our editors comes in. One of the best ways to begin picking better stocks is to see what the pros are doing - the pros who use these methods to select the best stocks to buy. Whether you're a growth investor, or a value investor, prefer fast-paced momentum stocks, or mature dividend-paying income stocks, there are certain rules the experts follow to maximize their gains. This applies to large-caps and small-caps, biotech and high-tech, ETFs, stocks under $10, stocks about to surprise, even options, and everything in between. Regardless of which one fits your personal style of trade, just be sure you're following proven profitable methods that work, from experts who have demonstrated their ability to beat the market. The best part about these strategies is that all of the hard work is done for you. There's no guesswork involved. Just follow the experts and start getting into better stocks on your very next trade. The Easiest, Fastest Way To Get Started It's simple. Gain access to all our recommended stocks for the next 30 days. Take part in the experience we call Zacks Ultimate. Total cost? Only $1. I'm not kidding And there's not a cent of further obligation. Do you have a preferred form of investment? If so, you'll find its expert recommendations among our trading and investing services. This is your chance to explore our Buffett-style value stocks. Insider trades (the legal kind) CEOs and other high-ranking officials are stockpiling. Simple yet powerful options plays. Income investments. The latest tech breakthroughs. But maybe you're not sure which types of investments are best for you. No problem. The $1 Zacks Ultimate experience can help you find out rather quickly and easily. Best of all, you can get in on our hot recommendations. Recently, for example, we closed gains of +109.6% in Commodity Innovators, +348.7% in Value Investor, +77.9% in Surprise Trader, and even +995.2% in Stocks Under $10.¹ Get started now and you'll receive a special bonus. We've released our Ultimate Four Special Report. Of all the stocks we recommend, these four have been selected to have the greatest upside for Q3 2022. Each has strong fundamentals and exceptional growth potential. Each is ideally suited to soar in current trading conditions. The opportunity to download Ultimate Four ends at midnight Sunday, August 7. Start Zacks Ultimate and see our Ultimate Four stocks now » Thanks and good trading,
Kevin Matras serves as EVP of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to start our see-all Zacks Ultimate $1 experience and download the Ultimate Four Special Report today. | ||||
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| ¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through July 4, 2022. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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