The Secret to Your Financial Survival
Montana is the most densely populated state in the continental U.S...
When it comes to grizzly bears.
I’m no stranger to them, having spent the last six summers fly fishing in Big Sky. On more than one occasion, I’ve seen folks give up their catch to a hungry griz.
Knowing there could always be a bear nearby, I keep a full can of bear-grade pepper spray handy at all times. It’s a precautionary measure I take very seriously.
But it almost ended in tragedy a few years back.
I was hiking in the backcountry when I heard a loud rustle in front of me. So I reached for my trusty can of bear spray...
Heart racing, I pulled out the can and aimed toward the commotion. I was about to squeeze the trigger... when I noticed the antlers.
Yes, I nearly sprayed a moose. A moose that was totally disinterested in me and my shaking can of high-powered pepper spray.
Had I showered him in a fog of hot pepper, things could have turned ugly, real fast.
The lesson here? Even in the wilds of Montana, the biggest threat to your safety is yourself.
The same is true when it comes to investing.
For example, consider how the stock market sold off after Brexit.
Investors heard the bushes rustling... but this time they actually pulled the trigger. Global markets lost $2 trillion in a single day - the biggest daily loss ever.
You know what happened next. Within three weeks, the S&P hit a new all-time high. If you were among those who bailed, you missed out on an 8% rally.
The same thing happened during the 2008 financial crisis. Investors panicked and sold.
But had they stuck to a disciplined investing strategy, they’d be up more than 40% today. (And they’d be up by triple digits if they had bought around the bottom in 2009.)
Instead, they sprayed the proverbial moose.
The key to surviving in the wilderness and as an investor is the same...
Be precautionary, not reactionary.
In other words, be prepared for the worst. But don’t ever let your emotions cloud your judgement.
Reactionary people are prone to panic. The results can be devastating to an investment portfolio. Just look at the crazy physiological effects of a reactionary response.
The science is stunning. Fear renders most people physically incapable of thinking clearly and making a rational decision.
The Laboratory of Experimental Psychology at the University of Sussex dug into just how harmful this can be. They found that individuals suffered a 49% drop in efficiency when confronted with a dangerous situation.
In backwoods Montana, that could cost you your life. In the markets, it could cost you tens of thousands of dollars.
Still, you must prepare for whatever may come around the bend.
Precautionary people are aware of their emotions... but they set up fail-safes to keep those emotions from taking over.
In the investing world, trailing stops are a perfect way to accomplish this. They automatically protect your principal when things get rocky.
If you’re a frequent Investment U reader, you know that our Chief Investment Strategist Alexander Green is a big advocate of using stops. In his words:
Among investors who lost money, the biggest reason was usually failure to protect profits and cut losses. Many investors are unaware that they can do just that by using a safe and effective strategy: the trailing stop.
A trailing stop is simply a stop loss order set a certain percentage below the market - and then adjusted as the price rises.
If you trade online, you can set stops on your brokerage’s website. Or you can call your broker.
Either way, you’ll want to familiarize yourself with this tool. Trailing stops keep you from being reactionary... and they can keep you from losing big money in the stock market.
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