Why I believe a Stop-Loss is vital…
A recent lesson I have learnt is the importance of a stop-loss. And the importance of not chasing a falling share with a hope of it reviving. Falling shares are a bit like falling stars there really is no point trying to chase it or figure out where it is going to land.
So anyway a while back I purchased what I am terming a “speculative” chunk of shares in Ruspetro (RPO.L) at around 1.51 for my portfolio; I had read good things, had done a little research. Albeit in a sector that I was clueless about. And I sat back and watched my “investment” fall away. Did nothing until I was around 72% down and then I somehow decided on the vaguest of data (the way most poor decisions are made) that this was likely to rally rapidly, so having convinvced myself I dipped in again at around 41p with the idea of clawing back my initial loss and going into overall profit when the rise eventually came. Almost inevitably the “markets concerns” which caused more than 70% of the value to fall, continued and I was now holding two paper losses. Then demonstrating the stubborness of human nature I had to almost physically stop myself from compounding the error by making further purchases (finally a correct decision) to average down. I thought I was past stupid mistakes.
Maybe I have been a bit hard on myself as these were always purchased as what I termed speculative shares, and are a small proportion of my overall portfolio. However I can see that my approach was completely wrong and the lessons learned should apply in principle to any investment I make again in the future. I should have set a stop-loss at a comfortable level of my purchase price, and stuck to it. If I was correct in my assertion that the share would recover (and it may yet surprise) I could always have jumped back aboard the uptrend instead.
So in conclusion the lesson here; I will always set a stop-loss and I will always stick to it even if it is a speculative share purchase as this was. A loss so far as I am concerned should always be minimised to preserve the original capital.
Author can be contacted: Investing1234@hotmail.co.uk
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