If you've been in the Stock Market game for quite sometime, you've probably encountered stocks that goes south and you're stuck to a losing position. When this happens, you only have two options… to cut your losses or wait for the market to rally and bail out when price reaches the break-even point.
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Now, if you have a huge amount of capital and is able to pump money to other positions. Then waiting for the market to rally is a good option. However, when you don't have any extra cash to deploy for a position. Then your best bet is to cut loss and invest the remaining funds to a more profitable stock.
But things are easier said than done… cutting your losses when you are down to 20% or 40% is very hard to do. This is the reason why many of the stock market players are willing to wait for the market rally and get out when they break even.
Think of the two options this way:
- Cutting your Losses - Saves you a lot of time in the exchange of loosing money.
- Break Even Point - Saves you money but in the exchange of time.
To give you a clear picture of how many percent of the gains do you need in order to break even, refer to the image below. I tell you, it is not a 1 is to 1 ratio.
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| Break Even Point Percentage Table |
Based on the image, it is clearly not a 1:1 ratio. Meaning, losing 1% will not equate only to gain 1% to break-even. Let us take for example the 80% loss, it needs to have a 400% gain just to reach the break-even point! As far as I know, a stock that grows 400% is rare if not impossible.
The point of this article is you need to be decisive when it comes to your under performing positions. When it reaches to a certain loss percentage you need to decide if you are going to cut or hold and not regret your decisions from that point forward.
Read this article "How to Calculate the Break-Even Point" if you want to know more about the the formula.
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- Your Life In Perspective by Ælfræd "Elf Counsel"
