FROG IS IN THE POT
You remember the story about the frog that
was put into a pot of cold water on the stove. He
was not concerned. Someone lit the burner and
the water began getting warm, the frog was very
comfortable and as the water became warmer he
was so relaxed and complacent that he fell
asleep – never to awaken.
Mr. Frog reminds me of today’s stock market
investors and that includes all folks with IRAs,
401Ks and the like. Stocks have been slowly
rising for the past year and a half (the water
is becoming warmer and warmer) and no one is
paying any attention to his investment
positions. The market is becoming overheated and
many investors are about to become boiled. Too
many are swimming fat and happy in the
increasing warmth with no thought of exit.
Currently the long term market trend is up
so complacency reigns supreme. It is doing exactly
the same as in 2000. When 2002 ended we had a
surplus of boiled frogs. A smart frog will not
be lulled to sleep and will have a plan to jump
out of the pot. A frog without a plan plans to
be frog soup.
There are many ways for the frog to escape
and there are many ways for investors to retain
their profits or at least not lose their money
the next time the market heads down. It will if
past performance is any guide to futures
results. Any plan to jump out is better than no
plan at all.
Whether you own stocks, mutual funds or
ETFs (Exchange Traded Funds) you can set a limit as
to how much you are willing to lose from this
point (that’s now, today). Any fool (frog) can
buy, but it is the wise man (frog) who knows how
to sell (escape the pot).
If you want to have money for retirement you
must protect your capital from loss with a risk
management strategy. First protect your
principle and then protect the profits you have
made on the recent stock market advance. It is
not difficult to do.
With stocks and ETFs you can place an Open
Stop Loss Order with your broker or financial
planner. He won’t like this, but it is your
money not his. Don’t let him talk you out of it.
For regular mutual funds you must have a mental
stop and when that price is hit you call your
broker (he won’t call you) or the fund directly
to tell them to transfer your funds to a Money
Market account. Cash is a position.
If you are not familiar with stop loss orders
you can find books in your library and there are
hundreds of articles on the Internet. See some
of my previous articles on my web site.
The water is heating up. Don’t fall asleep
and become a poor frog.
About the Author
Al Thomas' best selling book, "If It Doesn't Go
Up, Don't Buy It!" has helped thousands of
people make money and keep their profits. Read the first chapter
at www.mutualfundmagic.com and discover why he's
the man that Wall Street does not want you to
know. Copyright 2005