STOPPING A LOSS requires you to take a loss. Not all trains are runaway trains. You may want to stay on for the ride. The best way to determine the best strategy is to do so in the warmth and security of the railway station. Before things get moving, make a plan.
Financial escape velocity for a downward spiraling investment could get you to quickly going beyond a point of no return. Why not attempt to plot that point, at least in theory, and then set a stop loss number you will be able to live with. To stop a loss, you must sell your investment. Picking the point at which you wish to do this is prudent. Before you buy a ticket and get on the train, pick your out point.
Ideally, you will arrive safely at your investment destination and, perhaps, will go much farther down the line, but why not pick a point to limit losses if things begin to go in the wrong direction? Perhaps an even more difficult point to pick is where to get off a great train ride! The general rule in both cases is a little earlier than you might like.
Liquid investments can be liquidated on demand. They lend themselves to “buy” and “sell” orders. Non-liquid investments involving tangible assets are a bit more problematic. Land, buildings, a company, a product line — all can be investments whose value will require considerable conversion time.
The rule is that before you go in the door, check the exits. All this may sound theoretical. It isn’t. It is a strategy that works. To stop a loss, you must think in advance about how best to do that. Set the number and the timing that will be workable. Hopefully, you will be glad you did.