Stop loss or Cut loss?

Createwealth8888:

Stop Loss

Stop loss is when you pre-determine your own exit price to take the loss and walk away. It is just one of those bad trades and it is not that painful as the loss tends to be smaller.

Cut Loss

Cut loss is different from Stop Loss. Cut loss is when you felt so hopeless at the falling stock price and it has reached your threshold of pain. You bite your finger and sell it and move to the sideline for a while.  Cut loss is usually bigger and more painful.

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BT, Wed, May 26, 2010, Singapore

Resisting the urge to sell low


When stock markets lurch, hasty decisions taken at anxious moments can be extremely costly to investors


IF you've got money in the stock market, take a deep breath: It's one of those moments. The market is lurching, and that is precisely when impulsive behavior can hurt the most. Investing can be a delightful pastime when stocks are rising. When they are falling - which has often been the case lately - it can be excruciating. But hasty decisions taken at anxious moments can be extremely costly.

'When a lot of people reach their threshold of pain, they sell their stocks and try to move to more secure holdings.'

'When a lot of people reach their threshold of pain, they sell their stocks and try to move to more secure holdings - cash, bonds, Treasuries,' said Louis S Harvey, president of Dalbar, a fund research firm in Boston. 'These decisions don't work out very well for most people.' Over the long haul, the average investor has badly underperformed the overall stock market: Through December, over the last 20 years, the average stock fund investor has had annualised returns of only 3.2 per cent, compared with 8.2 per cent for the Standard & Poor's 500-stock index, according to Dalbar. Short-sighted moves in down periods account for much of the deficit, Mr Harvey said.

Lately, anxiety among investors undoubtedly has been rising. The flash crash of May 6 - the biggest intraday swing in market history - didn't help. Shortly after 2.30pm that day, the Dow Jones industrial average fell 1,000 points - and then came most of the way back, all in a matter of minutes.

The causes of that sharp drop aren't yet entirely clear, although they appear to be related in part to glitches in the connections of lightning-quick computerised stock trading across the United States.

In response, the Securities and Exchange Commission (SEC) last week said it would temporarily impose 'circuit breakers' on stocks in the S&P 500 when they have fallen 10 per cent or more in a five-minute period. The SEC and the Commodity Futures Trading Commission say they are still studying the crash, but don't yet understand it. And then there's the Greek crisis. Since the announcement of a nearly US$1 trillion bailout package for Greece and other fiscally strained eurozone countries, turmoil in global markets has not abated. Despite an upturn on Friday, stocks have been choppy; the dollar, Treasury bonds and gold prices have risen; and oil and the euro have plummeted.

Professional asset managers have been responding as best they can.

Robert C Doll, vice-chairman and global chief investment officer for equities at BlackRock, the investment management firm, says he thinks the American market is likely to remain relatively volatile for an extended period - and then resume its climb.

In addition to the angst caused by the flash crash, and the problems in Europe, Doll points to the bear market in China and the threat of economic slowdown there, as well as domestic issues in the United States. These include continuing uncertainty about regulatory reform, investigations into the activities of Goldman Sachs and other banks, and the unsettled state of the American economy. He says two other 'scenarios' are possible, but much less likely.

One is a global meltdown, with the Greek crisis morphing into 'Lehman II', the probability of which has been reduced by prompt action by European authorities. And the other is a quick resumption of the roaring bull market that took the S&P 500 up 80 per cent. But there are too many problems for that to be very likely in the next month or two, he said.

For long-term diversified investors, he said, it probably makes sense to ride out the storm, and, maybe, add to your holdings. 'Keep your shoulder harness on, and your seatbelt secured, and your life should be OK,' he said.

There are even reasons to be encouraged by the health of the global economy, said Larry Hatheway, chief economist and chief strategist at UBS Investment Bank. While he acknowledged the negative effects of the 'sovereign debt crisis' in Europe and myriad problems elsewhere, he also said: 'Signs of growth are very strong and incoming data is beating expectations, and this is true in all major economies, in all major regions around the world.'

Corporate profits are surging, Mr Hatheway said. Firms that cut costs in the recession are reaping immediate bottom-line benefits as revenue rises in a global recovery. And, finally, he said, central banks in Europe, the United States and Japan have kept short-term rates 'extraordinarily low, near zero.' 'We've got low rates, strong profits and strong growth,' he said.

'That's a pretty powerful combination to boost stock prices.' It makes sense for big institutions to engage in tactical manoeuvres - buying stocks that seem cheap because of a market drop, for example, and emphasising sectors that may benefit from economic shifts, said Derek L Young, chief investment officer at Fidelity's global asset allocation group. Fidelity is analysing the implications of a possible 'prolonged period of weakness in the eurozone'.

One thing you don't want to do, he said, 'whether you're a professional or an individual investor, is to make an emotional judgment about the marketplace.' - NYT


"When you are emotional, you make unwise decisions rapidly." - Warren Buffet