The Importance of Limiting Losses

Limiting losses is critical to good investment performance.

This is because of the time and difficulty involved in recovering from large losses. 

For example, a drop of 5 percent requires a 5.2 percent gain to get back to even.  A drop of 10 percent requires a gain of 11.1 percent to get back to even. 

But a drop of 20 percent requires a 25 percent gain to recover completely.  How often do investors get a 25 percent gain?

It is best to avoid the large loss to begin with. 

This is done by defining an exit strategy before you make the investment.

The next time you meet with your financial service provider, ask them this question:  How much money will you let me lose before you prevent further losses?

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