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4 Simple Ways to Limit Losses in Stock Investing

Wall Street

Anyone who has read the headlines recently, or over the last few years for that matter, knows that the stock market has been fraught with major down days. Gone are the investing days where you can just buy and ignore as that puts you in danger of losing money in the wild swings the market has taken us on the last four years. These wild swings can play a toll on emotions if a good strategy is not in place to help mitigate losses. Although there is no way to protect yourself from ever losing money while investing, there are a number of ways, which when implemented correctly, can help limit your losses and guard yourself against wild market swings.

Diversify Your Investing

This is one of the best ways to help limit losses in a portfolio. When we speak of diversification, it means holding investments in different asset classes as well as across different sectors and industries. The theory behind doing this expects that as some investments go down, others go up and balance each other out. There are of course some days where everything is going down, but also days where everything is going up. By diversifying you can lessen your stress level and limit potential losses. If you don’t know what you want to invest in, but want to diversify, then a good option would be investing in a low cost index fund.

Related: If you’re looking a new online brokerage, then check out my OptionsXpress Review for a solid option.

Lower Your Costs

The underlying problem of trading too often, assuming you’re not a day trader, is fear. Fear of the bottom is falling out will lead many to bail out and take losses they normally would not. This poses a twofold problem as it breeds the possibility of taking significant losses while at the same time racking up trading fees. Sure, the online brokerage will love your trading, but it may not be the best for your investing. You can’t always control how much an investment will lose, but you can control the amount of commissions you accumulate. The easiest way to do this is to find a discount brokerage that best fits your needs and has a low commission.

Use Stop Orders

How much are you comfortable with losing on an investment? That decision will help you set up a Stop Order for the stock. This order can be placed at any time after you buy the stock. If you decide that you can handle a 10 percent loss but no more, then you simply place an order at 10 percent less than what you paid and it can sit there for several months if you choose. This can protect you from emotional decision making and also protect you if you’ll be unable to access your investment accounts for any reason.

Put Your Emotions on the Shelf

You can follow the first three steps perfectly, but if you allow your emotions to get the best of you, it will be all for naught. No one likes losing money, especially someone who chooses to live frugally. This is why it’s best to have an investment plan in place to help separate emotion from your investment decision making. Instead of looking at the current day’s loss in a vacuum, look at it as a whole. After all, in general, that investment that has just lost will likely come back up.

There is no guaranteed way of protecting yourself against losses while investing in the stock market. However, by actively directing your investments with a few simple steps you can help limit those losses and protect your portfolio for the long haul.

What have you learned to do to limit your losses while investing in the stock market?

 

Photo courtesy of: Robert Linder

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally

18 Comments

  • I know it is best to invest without emotion but I find that hard to do because I like to invest in things I believe in. I am really trying hard to break this habit though because I know it is not the soundest approach.
    Miss T @ Prairie Eco-Thrifter recently posted…Cutting Costs and Buying Used ClothesMy Profile

  • John says:

    It can be hard to break that habit, one that I still deal with at times. Especially with how the market is these days it can be hard to “weather” such wild swings. That’s why I like to have a written plan to help me with decisions. I find that helps a lot when dealing with the emotional side to investing. Thanks for stopping by!

  • Stop orders are great! I use this to minimize losses on our employee stock purchase plan. They buy it in bulk every six months and I’m faced with the decision to sell or keep the money exposed to the market. I set a top order a couple dollars below what it’s trading at to minimize any losses but also have a little upside exposure.
    DC @ Young Adult Money recently posted…Realtors: “Now” is Always the Time to BuyMy Profile

  • John says:

    Yea, I love stop orders. They can be a very useful tool. I like to recalculate them up as the stock continues to go up. They can also be great if going on a trip and I don’t want to have to deal with my investments while gone.

  • Veronica @ Pelican on Money says:

    To be honest, I don’t have a lot of experience in stock investments. I’ve done a little here and there but most resulted in complete losses. I also had the opportunity to get both feet into stock trading but my affiliate income at the time seemed like a much better income opportunity to devote time to. I do want to learn more about how to trade stocks but I’m also really fascinated with forex trading. Do you know anything about that?
    Veronica @ Pelican on Money recently posted…LinkLuv Friday You Cheered Me UpMy Profile

  • John says:

    I can completely understand on the affiliate income Veronica. There is a lot of educational tools out there to get started on stock investing, but comfort level is key. I do know a bit about forex trading, not as much as I do about stocks though. I know just enough to be dangerous, but due to the risks associated with it and my lack of a comfort level I’ve not jumped in to it. Maybe something down the road…maybe a future post idea. ;) Thanks for stopping by!

  • It helps to have absolutely no free time. You check the market much less often then. LOL! I have invested in my retirement fund for years, and since that money is so far away, I realize it will go up and down, so that doesn’t really bother me. For the past year or so, I have been putting some money into ETF’s through sharebuilder on ING, that’s about as cheap and easy as it gets. I really need to diversify more, but I have a hard time not going with stocks. I guess our rental investment is enough diversity for now.
    Kim@Eyesonthedollar recently posted…Can’t Take My Eyes Off These Blogs #5My Profile

    • John says:

      Having little free time does help Kim. ;) Going through Sharebuilder is a great way to put some money into the market. Money off of rental income is a great way to diversify as well.

  • Jason Clayton | frugal habits says:

    Stop orders are a must if your stock investing. I use them all the time and they have saved my butt in the past… but your last item is key for any investor. Using your emotions will kill you financially, it absolutely can’t be overlooked.

    A big way I’ve learned to limit losses is to just pay attention. It is easy to invest and forget, and not follow up on reading the quarterly reports, etc. Keeping yourself informed on the security is essential.
    Jason Clayton | frugal habits recently posted…Pay off your Mortgage Early without Refinancing – 6 Easy StrategiesMy Profile

    • John says:

      I couldn’t agree more Jason. Keeping emotions out of your investing is key. I know that it can be difficult to do so at times, but it can ruin an investment plan. Great point on paying attention. Investing in the market requires some time and attention. If you, as an imvestor, just set and forget your investments could very well be ravaged as a result.

  • Great list! Too many investors don’t understand how much fees cost you when you buy/sell. The smaller your order, the higher the percentage of fees you are paying.

    I wish I know more/understood stop orders better too when I first started investing. They could have saved me some of my money!
    MoneySmartGuides recently posted…12 Months of Goals: OctoberMy Profile

    • John says:

      Thanks Don! I completely agree about fees. I think many times the education needed is minimal, but can save so much in the long run. I too wish I knew more about stop orders years ago, they can be such a useful tool.

  • I am hoping to be more investment-savvy soon. I am so interested but I don’t know where to start! I have a Roth IRA but am looking into dividend yielding stocks more and more for passive income.
    Debt and the Girl recently posted…My Favorite Christmas MemoriesMy Profile

  • Great points John! I never had much success with stop orders for the simple fact that timing when to get back into the market is difficult at best. I find that over the long run, dollar cost averaging, having a diversified portfolio, and rebalancing quarterly works for me.
    Paul @ The Frugal Toad recently posted…Frugal Used Car Buying TipsMy Profile

  • Martin says:

    I used to use stop loss orders, but many times I was either kicked out too early (although I set the stop at the level I was comfortable to take the loss) or too big loss when trying to lower the stop. So stop losses never worked for me the way I would be comfortable with. Since I trade or invest in dividend paying stocks, I no longer need stop loss orders, since this is a totally different strategy.

  • I would agree with all of these being a former broker myself. I highly recommend the last two of stop orders and controlling emotions. With stop orders I do prefer the stop loss/limit option just in case I get an ugly open print. Controlling emotions is an ongoing process for everybody. It is good to know where the boundaries of your emotions are so you don’t use them to invest or trade.
    Chad | The Stock Market and I recently posted…S&P 500 close October 21 2013 at 1744.66My Profile

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