Anyone who invests in the stock market needs a plan that helps him cut his losses when the market performs poorly. Many expert investors believe that while it’s impossible to completely avoid losses, a careful, an analytical approach can help one stay clear of catastrophe. One may study market signs, predict a crash, and get out when there is time.
Nearly no investor possesses such skills
Even expert investors find it impossible to analyze the market well enough to predict every serious downturn. In 2006, top investors believed that WaMu couldn’t fail. The company paid high dividends and seemed dependable. Many major investment firms invested large parts of their capital in WaMu stocks as result. In 2008, though, WaMu no longer existed.
For all practical purposes, then, predicting how a stock will do should be considered an impossibility for individual investors, their brokers or their financial advisors. The alternative, traditionally, has been the setting up of a stop-loss order.
The stop-loss strategy
A stop-loss is a simple investment protection strategy. Investors look at the way a stock has behaved over a few years and then instruct their brokers to automatically sell their holdings if the stock falls below a point.
For instance, an investor with a stock that costs $50 might find that historically, it has gone as high as $55 and never sunk below $45. The investor, then, can instruct his broker to automatically sell if it the stock should ever sink below $45. This way, he would be able to get out before the value of his investment completely crashed.
The problem with the stop-loss strategy is that it only protects the investor from drops in value from the stock’s current level. If the stock in this example were to quickly go up to $55 and then rapidly sink to $44, the investor would lose $11 a share — a massive loss.
If the investor could have sold once the stock began to sink from the $55 level, he would have made a decent profit on his investment. The stop-loss method, though doesn’t allow the setting of dynamic sell levels. It only allows simple levels.
What the investor needs here, then, is a broker who is able to constantly monitor his stock and automatically sell if it should ever fall more than 5%, whatever price level the stock might reach.
This is the flexibility afforded by AssetLock software
AssetLock is an investment software firm that brokers and investment advisers sign up with. When an investor invests through a broker or advisor who has access to the software, his portfolio is monitored in real time. He is able to set dynamic stop-loss orders: whatever highs the stock may reach at any point, AssetLock will never allow a fall by more than a set amount.
In the example above if the investor had had AssetLock, he would have been able to instruct his broker to never let his investment fall by more than 5%, whatever levels it reached. This way, once it began to fall below the $55 high, AssetLock would have caught it at $52.25 and sold. The investor would have kept nearly all of his gains.
While a stop-loss strategy does have its place, AssetLock offers the flexibility of intelligent, full-time protection.