Reduce losses

Minimising Your Losses When Investing

When most new Speculative investors begin their careers they don’t think about minimising their losses. The first and often only thing on their mind is how do I make money. To analyse a potential Speculative Investment they research stocks, check mentions on social media, calculate an entry, forecast potential exit strategies and then lastly click the buy button. Then they watch the stock like a hawk waiting for their profit target to be reached to cash in on all that hard work. Even though this may seem like a very logical process it will, in most cases, inevitably blow up their accounts.

Now what I am about to say is going to sound dumb but bear with me. The most important rule in being successful in a speculative investment actually has nothing to do with making money! The most important rule is minimising your losses. For at least the first 3 years the market is going to serve you with more hard lessons than you have experienced in your entire life. You are entering into a minefield that can’t be learned in books or YouTube motivational videos. By minimising your losses, you will be able to build yourself from the ground up and increase your knowledge and experience. The longer you can survive the blow after blow that you will be dealt with then the greater the chance of long term success that you will have.

Minimising Losses

Minimising Your Losses Example

Let’s say that you own 5 stocks with an average win rate of 60%. That sounds great right? Anyone who is winning more times then they are losing will obviously be successful right? Let’s see if this is always the case in the below example of an investor with a portfolio value of $10,000 invested equally across 5 stocks.

Speculative Investment 1 is purchased at $1 and sold for $1.20 resulting in a $400 gain.

Speculative Investment 2 is purchased at $2 and sold for $2.60 resulting in a $600 gain.

Speculative Investment 3 is purchased at $0.50 and sold for $0.55 resulting in a $200 gain.

Speculative Investment 4 is purchased at $0.80 and sold for $0.80 resulting in a breakeven result.

Speculative Investment 5 is purchased at $1 and sold for $0.05 resulting in a loss of $1,900

So in this example the investor has only had one loss but their overall portfolio is down $700.

Hence the key is to have a system in place which ensures that you minimise your losses and keep them small. Steve Burns puts this in a really simple way to understand, “10 small losses plus 1 big gain can create wealth. 10 small gains plus 1 big loss can destroy wealth.”

money on a chart

Practical Takeaway

Within your investment strategy Write a plan for each speculative investment you own or plan to own in the future. What is your exit plan and at what stage do you sell to ensure your loss is small I comparison to your overall portfolio value. Even with the best strategy and intentions, no stock is guaranteed to succeed so you must at all times know what your exit plan is before you even press the buy button. That way you can ensure that you remove as much emotion as possible and if things don’t end well, then you escape with a small loss. If you don’t have any investment strategy, I have provided an example of my own as a starting point for you.

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