Tuesday, May 19, 2009

Trailing Cut Loss is for everyone

If you were to invest $100,000 in 2004 and the next 4 years (end 2007), you achieve a gain of 25% annually with all money re-invested. How much would you made?
end of 2004 - $125k
end of 2005 - $156k
end of 2006 - $195k
end of 2007 - $244k

If in year 2008, you lose 60% of your gains, how much would you have made?
END OF 2008 - $97K left (a loss of $3k after holding for 5 years)

If instead of holding from 2004 to 2008, you get out of the market once there is a 25% decline from the highest point in your stocks since you purchase in 2004. How much would you have made?

Assuming in the year 2008, a 25% decline in your portfolio value is noted and you get out of all your equities.
End 2008 - $180k (a profit of $80k after holding for 5 years)

Food for thought. If you have the conviction to take profit off the table, wouldn't it have been better? You cannot time the market, but you can use your portfolio value to show you the way out.

*By the way, 25% is set because we do not want the violatility of the market to trigger your cut loss when the market is only experiencing a minor setback. Most bear markets decline is between 30% to 60%. So if it gets to 25%, you can be sure there must be something fundamentally wrong for a lot of stock holders to want to get out ahead of you. For traders, they might be more interested in cut loss level of 8% - 10% since they are actively trading the market instead of buying and holding for a market cycle.

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