There has been a saying when it comes to investing, a lot of people expect to do exceptionally well when they first start investing. The reality with most early newbies can often be a mixed experience and a mixed result, if proper preparation or guidance is not provided.
When it comes to investing in shares, it is always easy to enter with very few barriers. You can open a basic share trading account and trade for as little as $1 in brokerage. When a newbie starts investing they think about the millions they are going to make, but few think about the exit strategy and what that might look like when things don't go according to plan. The major obstacles in most cases in the psychology of crystallising a loss or potentially being wrong.
A long time ago before kids, when time was plentiful and in no shortage, I used to play golf. I often found that the game was a great equaliser. You might hit a perfect round one week and leave the course believing that you had finally mastered the game. Then, the very next week, you would turn up expecting to replicate the similar magic, only to have a horror round. As such, the game quickly brought you back to reality.
Investing, if you are not careful, can have a similar impact, particularly if early on you have a wonderful result in a speculative investment. Immediately you feel that you have the "midas touch" - the ability to turn everything you touch into gold. I believe it is at this point in time that you need to be most careful with your mental and psychological approach to the market.
We have often seen people take unnecessary and extreme risks with investments, as they have taken a double or nothing approach.
So when it comes to investing, it is particularly important to look not at only your 'attack strategy' -how to capitalise on a particular investment, market or sector, but it is equally as important to think about your 'defensive strategy' - how will you behave when things don't go to plan and what should you do.
Sometimes the best defensive play is to simply just remove the biggest inhabitant to minimising loss. This might be a little hard to take but in some cases it might just be the you, the investor. When one loses money the investor's psychology can run wild. To date, I have not met anybody who is over the moon with excitement when they have made a loss on their investment. Crystallising this can sometimes be even harder for some.
The easiest way to sometimes combat this is to simply insert a trailing stop loss each time you invest in the share market. This does two things from an investing perspective. The first, and most important, is that it automatically removes decision making around if you should or should not get out. The second is it provides a reset button on your strategy to review and revisit the approach.
A trailing stop loss simply follows behind a share. If you imagine a dog walking along, the leash is the share price and the dog racing along in front of you. The stop loss continues to follow along and enjoy the ride.
If the share price turns and then starts to drop you have the ability to exit the position at a pre-agreed percentage. The other advantage is that you have protected your profit.
Now like most great ideas there are some elements to consider with this strategy. For example if you have held a stock forever and sitting on a significant capital gain this could trigger a nasty capital gains tax bill, and you might think twice about this strategy.
Alternatively, if you set your trailing stop loss too tight then you may be bounced out only for the position to turn around and head back up. It is amazing how many people set their stop loss positions at even number such as $1 or $2.
Like all great investment ideas, if in doubt you, might want to speak with AJ Financial Planning to find out a little more of how to implement such a strategy into your portfolio.