An Investing Secret - Why Buy And Hold Does Not Perform By Christopher Smith At Isnare.com Ezine Articles

Its so easy today to trade. Place your order, press submit and you instantly can become a shareholder. Ask any officer of a publicly traded company, and they will tell you, they love when shareholders buy and hold. This helps the stock retain its value (instead of selling their shares like everyone else, they hold, avoiding an even larger drop in share price). While you probably wouldn't consider driving downhill without brakes, why would you buy and hold onto a company that is losing you money? This is where an investment plan comes in.

Why Buy And Hold Does Not Perform

A stop-loss order is basically a set of demands for the sale of your stock at a certain point-generally when they fall below a certain price. This isn't a guarantee against loss but it is a very important line of defense. You can choose the stop-loss point based on a percentage drop in the price or even certain patterns. Some brokers will even set your stock-loss price higher as the value of your stock rises in order to protect the maximum possible profit on your behalf.

Folks who reason that the buy and hold strategy of investing works, will simply point to Warren Buffet. The world's most effective investor has the mark of someone who lives and breathes the buy and hold strategy. Unfortunately, its not altogether exact.

Unlike you and I, Mr Buffet is in a position to buy a controlling interest in the companies that he is investing in. This gives him the power to help sway and make notable decisions about who will make the decisions in the business. As a shareholder of the company, he has the ability to make companies more efficient by removing dead weight. Any decisions that the company makes that call for stakeholder ratification will have to be ratified by Mr Buffet in order for them to go through. So, unless you are able to purchase as many shares as him, you're only recourse is to sell if you don't like the bearing the company is moving in.

When public companies declare bankruptcy it is quite rare that stockholders will receive any kind of compensation whatsoever. Stop-loss orders are a great way to prevent this from occurring.

The point is, as an investor, you need to protect your investment. No one else is looking out for you like you will. So, since you can't influence the board of directors, you might as well take precautions. A stop loss is your best defense. If the share price moves lower, clearly a lot of people with a lot more money than you are moving out.

Here's a great saying that should help you remember the important of a stop-loss order: "If the smart money has sold and moved on, what type of money still owns the stock?"

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