Sunday, June 2, 2013

It's Not About How Much Money You Have

Would you be happy with a million dollars? Most people would answer "yes" but what if you had made $20 million investing in real estate or stocks and all of a sudden you lose it all but $1 million.  Now let's ask the question again would you be happy with a million dollars? The answer would be "No" you would have a hard time forgetting the $19 million you lost.  Losing large sums of money from an investment gone wrong is one of the worst feelings a human being can experience it can be unbearable.  It is not always about the sum of money you end up with it is about how you get there.  Developing good money management skills is essential to survive and avoid losing money.

On January 14th 2013 I bought 1000 shares of Facebook (FB) at $31.27 (10:43 am-10:45 am) I sold the 1000 shares at $31.38.  I made $110 on the day trade, sure I could've made a little more money had I kept it a few minutes longer but from experience I exited at the right time.  The stock was extremely volatile for the day it is not a stock to trade if you are risk averse.  Holding on to the stock for the long term would have been a mistake as the stock closed at $30.95.  On January 15th the stock closed at $30.10 I would've ended the day with a $1170 loss.  Had I continued holding it with hopes to pocket thousands of dollars in profits I would've gotten quite the beating.  Facebook never hit the $31.27 price point after January, fast forward to this past week FB closed at $24.35 I would be down $7000, on Wednesday I would've been down $8000.  Would you be happy with $24,300? Not after that trade! Right now I would be thinking how I turned a $110 profit in 2 minutes to a $7000 loss in 4 months.

What if the stock comes back up in the following weeks to $40 a share? It doesn't matter that trade should have been exited immediately, $31 would have not been the right entry point for a long term investment.  You lose time and money by holding on to an investment that goes wrong.  A bad trade should be exited at a 5%-7% loss, the moment the trade starts going against you it may be time for the flip, meaning exiting the trade, accepting you were wrong and shorting the stock to profit from the drop in price.  Traders need to know that an $80,000 loss starts out as a small loss that was not dealt with correctly.  Invest wisely remember the more money you have the bigger your losses will get.  The rule is to cut losses quickly to enjoy your ascent to financial freedom.

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