The stock market has been going up for the last three years. Are you rich yet? What most investors fail to remember is not how much you made, but how much of what you made you keep.
There were thousands of paper millionaires in 2000 who are wishing they had known when to sell at that time. Of course, hind sight is always 20/20. Is there any method that could have been employed that would have given an investor a chance to keep most of his money? Yes, but even if your broker had known about it his brokerage firm would discourage telling you.
If you had known and told your broker he would have pooh-poohed the idea and if his boss found out he was encouraging his clients to follow the method he probably would have been fired. It is a simple exit strategy used by all prudent investors during bear markets.
There are two ways to keep your money.
A simple trailing open stop loss order is easy, but requires your attention on a regular basis. You must first decide how much you are willing to risk. Many professional traders recommend 10%, but depending upon market conditions and type of equity it could be more or less. When in doubt 10% is a good number.
Another very excellent equity-protector is a simple moving average. The shorter the time frame the quicker a position will be exited. Also many stocks have a history of violent ups and downs. For the non-professional it is best to invest in no-load mutual funds and use a longer time period simple moving average.
Even a simple moving average must be mastered. Many texts on technical trading speak of action when the line is penetrated, but experience will teach the direction of the line is the key to the greatest profits.
A long-term 200-day moving average line used for mutual funds keeps the investor in the position as the line is ascending. When the line turns down the investor sells. The 200 line for mutual funds is not affected by the daily movements of the stocks within the fund,
Observation will prove that once a trend is in place either up or down it will last for a considerable period of time –usually years. During these down periods the investor does not give back previous profits. That is the key to becoming wealthy with equities.
In recent years many smart investors have discovered bear mutual funds. These are very special funds that move in the opposite direction of the general stock market. 401K-type plans do not allow short selling, but do allow purchase of this type of mutual fund. Now the investor can make money while the market is going down as well as up.
Brokers will not help you with this plan, but it is your money. Unless you take charge you will never be able to answer “YES” to that important question.
This article was posted on June 28, 2006
About The Author
Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.
Other Articles By Al Thomas