Why It’s Better to Cut Your Losses Early

You may have heard the expression “cut your losses early” before. This is probably the most profound wisdom for stock investors. The table below will illustrate the reason behind this insight.

Cut Your Losses Early

The table shows that it is exponentially harder to recover from the decline in stock value. For example:

  • If a stock loses 10% of its value, it only takes a gain of 11% to make up the loss.
  • If a stock loses 20% of its value, it takes more effort at a gain of 25% to make up the loss.
  • If a stock loses 50% of its value, it takes improbable gain of 100% to make up the loss.
  • If a stock loses 90% of its value, it takes impossible gain of 900% to make up the loss.

This is why stop-loss order of 10-20% below the price at which you bought is recommended. It takes enormous effort to recover from anything greater than that.


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