The first reason is because they simply don’t know that it’s part of investing successfully. Learning about stop-losses and risk management simply isn’t as sexy as learning about how to make triple-digit gains. So the subject is often avoided.

Second, it’s a matter of emotions. You see no one in the world – not me, not you, or anybody else – enjoys selling stocks at a loss. It’s a pain that nobody wants to inflict on themselves. So as long as they don’t sell at a loss, they never end up ‘inflicting’ the pain.

Then there’s the prospect of selling at a loss and then looking at the stock a few weeks later, only to find that you could’ve sold it for a gain. Now, the investor might feel embarrassed or foolish. Nobody wants that. So emotionally, it makes sense why a lot of investors don’t follow through with an exit strategy. But logically, an exit strategy is IMPERATIVE to making money in the stock market.

If people didn’t take their losses, then they’d never free up capital to pursue better opportunities. Heck, if people didn’t take their losses they’d eventually have no capital at all.

This is a situation you don’t want to put yourself into. So before you get into a trade, MAKE SURE to have an exit strategy planned. And you should do this for every single trade.

If that means selling your position once you lose ten or fifteen percent, then follow through with it! If your exit strategy is simply to sell if the fundamentals of your buy change, then make sure to follow through with it!

Either way, just remember to ALWAYS have an exit strategy before you invest. And more importantly, FOLLOW THROUGH WITH IT!

Good trading,

Charles

We saw her arrive… She drove a black Suburban of some sort, with enough chrome to make a Detroit drug dealer blush.

She and her husband are young… probably in their late twenties. He’s apparently a builder in Georgia. Of course, homebuilding in Georgia died about two years ago… But even though their income must be down, their spending hasn’t changed.

This young couple isn’t the only one out here sporting an iPhone and a blingy black Suburban. What’s going on here?

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Me? I don’t have an iPhone… Or a blingy Suburban… But I probably have one thing these conspicuous consumers don’t: The house I live in is fully paid for.

I handle my money differently. I could buy an iPhone or a Suburban tomorrow. I wouldn’t need a penny of debt to do it. But I won’t… Why? Because I know those things won’t make me the slightest bit happier. I’d be the same dolt I was before… only now, I’d be $50,000 poorer!

It took me a while to get to this point in my life. But I’m glad I made it… I’m at the point where I can buy what I want. But I don’t. It’s an important point to reach.

I don’t try to keep up with the Joneses. I’m doing the opposite, actually. I’m downsizing. I’m reducing my “stuff.”

Think about this… What good is all this stuff, really? You can’t take it with you when you die… Doug Casey, the legendary newsletter writer who joined us last week on Jekyll Island, says it best:

“I’ve never seen a hearse with luggage racks.”

Doug is extremely wealthy, and has been for a while. But he didn’t arrive at Jekyll Island in a blingy Suburban, and he wasn’t chatting on an iPhone.

My friend Bob Bishop is a wealthy guy like Doug. Bob wrote the excellent Gold Mining Stock Report newsletter for a few decades. He recently retired. Bob decided to sell some of his extraordinary possessions… for no particular reason I could see. He didn’t need the money. And they weren’t really taking up space. I asked him why he was selling. He said:

“After a while, you don’t own your stuff… Your stuff owns you. Steve, you’re young… so you’re probably in the accumulation phase. Me? I’ve been there. Now I want to downsize and simplify. I don’t need all this stuff.”

Bob can buy anything he wants. But, like Doug, he doesn’t drive a blingy Suburban, and I doubt he’s got an iPhone. It’s just stuff!

This brings me to the point of this essay… What’s the point of saving money anyway? What’s the point of investing?

When you get older (if you’re not already older!) just what are you going to buy with that money you’ve saved?

Jonathan Clements gave a good answer to this in his farewell column for the Wall Street Journal this week (Clements has written more than 1,000 columns for the Wall Street Journal).

Clements says your savings “can deliver three key benefits.” Even better, he says, “You can enjoy this trio of benefits even if you don’t have great wads of cash.” Here’s how:

1. If you have money, you don’t have to worry about it.
2. Money can give you the freedom to pursue your passions.
3. Money can buy you time with friends and family.

When I think about it, these three things are exactly what Doug and Bob are doing with their lives. The great thing is, it doesn’t (usually) take millions to spend time with friends and family or pursue your passions. You don’t need a fortune to live well.

But in order to get there, the Georgia homebuilder couple needs to skip out on his and hers blingmobiles.

The quicker you grasp this about saving versus spending, the quicker you’ll be able to start living like Doug and Bob… even if you don’t have many millions in the bank.

You might think it’s hard to stop buying ultimately useless stuff… You might think it’s hard to stop keeping up with the Joneses.

But actually, it is quite liberating… And even better, you’ll be financially free much quicker. So give it a try…

Good investing,

Steve