Limit Your Losses to 7% or 8% of Your Cost

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Limit Your Losses to 7% or 8% of Your Cost

Individual investors should consider adopting a firm plan to try to limit the loss on initial invested capital in each stock to an absolute maximum of 7% or 8%. Because of position size problems and broad diversification which lessen risk, most institutional investors do not usually follow such a quick loss-cutting plan. This is a terrific advantage you, the individual investor, have over the institution, so use it.I am talking about cutting your loss when it is 7% or 8% below the price you paid. Once you are ahead and have a good profit, you can afford to, and should, allow the stock more than 7% or 8% room for normal fluctuations in price. Do not sell a stock just because it's off 7% to 8% from its peak price.

When the late Gerald M. Loeb of E. F. Hutton was writing his last book on the stock market, I had the pleasure of discussing this issue with him in my office. In his first work, The Battle for Investment Survival, Loeb advocated cutting all losses at 10%. I was curious and asked him if he followed the 10% loss policy himself. He said, "I would hope to be out long before they ever reach 10%."

Bill Astrop, president of Astrop Advisory Corporation in Atlanta, Georgia, suggests a minor revision of the 10% loss-cutting plan. He feels individual investors should sell half of their position in a stock if it is down 5% from their cost and the other half once it is down 10% below the price paid.

To preserve your hard-earned money, I think 7% or 8% should be the limit. Your overall average of all losses should be less, perhaps 5% or 6% if you are strict and fast on your feet. There is no rule that says you have to wait until every single loss reaches
7% to 8% before you take it. On occasion, you can sense that the market or your stock isn't acting right or that you are starting off amiss.Then you can cut the loss sooner, when a stock may be down only one or two points.

ALSO, 7% TO 8% BELOW YOUR PURCHASE PRICE IS THE ABSOLUTE LIMIT. Once you get to that point, you can no longer hesitate. You can't think about it or wait a few more days to see what might happen. It now becomes automatic—no more vacillating—sell, and sell immediately at the market. The fact that you are down 7% or 8% below your cost is the reason you are selling. You don't need any other reason. At this time nothing else should have a bearing on the situation.