Don’t Make This Critical Investing Mistake!

| October 21, 2011

I’m one of the lucky ones… I learned an important lesson early in my trading career.  It’s a lesson I’ve drawn upon frequently over the years. And it saved me tens of thousands of dollars.

You see, I was making a big mistake every investor makes from time to time.  One that can be incredibly costly if you continue to repeat it…

What did I do wrong?

I fell in love with a stock!

In my case, I fell in love with a bank stock.  I had a winner on my hands and I believed this baby was going to keep running higher and higher forever!  Of course, it didn’t, and I got burned.

Does this sound familiar?

I’ve heard this story time and time again.  I hear it at work, at the gym, even on the golf course… everywhere.

I get asked what I do for a living and everyone wants to tell me their war stories!  “Oh, I got burned real bad by holding onto Travel Zoo… and I could have made a fortune if I had only sold it near the top!”

“Coulda, woulda, shoulda…”

Or my favorite story… “I can’t believe I thought Enron’s stock would ever come back.  I just kept buying more and more on the way down!”

Maybe this has even happened to you?  If so, you’re in luck…

I’m going to share a couple of tips to avoid getting saddled with a losing stock… just because you love the company.

In retrospect, I can see how I got attached to the bank’s stock.  It was no longer an investment.  It was mine… like a favorite toy.

But warning lights should have been going off in my head… and they weren’t.

Here’s where I missed the boat…

Since owning the stock, I watched it skyrocket over 350% at its peak! That’s an absurdly huge gain.  But instead of treating the stock like an investment and selling it, I became attached.  It didn’t matter what it was worth (at the time).

All I could think was, “At this rate, I’ll be set for life!”

That’s where I made my mistake.  And it’s exactly what you need to avoid when looking at stocks in your portfolio…

So how do you avoid making the same mistake?

First, set your target for selling the stock if it goes against you.  Pick a target price you are willing to see the stock fall to and then sell the stock when it reaches the target.  It will help you avoid hanging on to big losers longer than you should.  You don’t ever want to be in a position where you’re hoping a stock will recover its losses.

Remember, hope is not a portfolio management tool…

Second, have a plan for capturing profits.  Believe it or not, this is the hardest part of investing.  Here’s why…

When a stock becomes a loser, you’re more likely to realize you need to sell it to avoid a larger loss.  It’s pretty clear motivation.  But when you have a winner, it’s easy to become greedy!  You start telling yourself “this stock will make me a millionaire.”

It’s at this point where investors go wrong most of the time.  And again, it’s where I made my big mistake…

Sure, some stocks go on epic bull runs that last for years.  But more often than not, they’ll never be the next Apple.

Here’s how to avoid missing out on taking profits…

Just as you need to have a target for selling a loser, you need to have a target for selling a winner.  Without a specific profit target, your investment gains can quickly diminish and/or turn into losers!

Try to separate your love of the company or product from the stock itself.  And definitely keep this investing fact in mind at all times… stocks never climb non-stop!

Remember, you’re investing money with the specific purpose of making a profit.  Having profit targets, and using them, is a sure fire way to grow your portfolio.

Looking back, I can see I made this very same mistake.  I missed a huge profit because I was in love with the stock.  I thought it would go up forever!

With that said, my mistake should serve as a solid reminder to you.  Be ready to capitalize on your winners when they present themselves…

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Category: Stocks

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