It's Safer to Spread your Jam Around
Dear Crazies,
In these difficult and uncertain days, it pays to take steps to limit your losses when things go pear shaped. You can, of course, set an automatic stop loss with stocks you buy through Sharecrazy. com.
But because of some technicalities of this procedure, such stop losses can’t always be guaranteed. However, it’s often a good idea to put automatic stop losses in place for the many times they do help.
Yet there is another way you can curb your losses without taking any action which involves constantly monitoring the progress of your stock. And it’s devilishly simple.
The trick is to buy into as many companies as you can, by investing small amounts, rather than huge wodges of cash. For example, if you hold shares in 100 companies after investing £200 in each firm , it will cost you £20,000 smackers.
Now if one of these companies crashes altogether, you will only lose 1%. If five companies go belly up – and you’d have to be exceedingly unlucky for this to happen, then you’d still only lose 5% of your total cash.
If one the other hand you split your £20,000 into only two companies and one firm goes bust, you’ll shed £10,000. Ouch!
Now I’m talking extremes here. You probably won’t buy as many as 100 companies, even if you had £20,000 to spend. And you almost certainly would not be rash enough to invest in only two firms.
But I’m trying to make a point. If you are a cautious soul, as I am and which I strongly advise in Crazyland, then spreading your money over a lot of companies, rather than a few is the safer bet.
But there is a snag -isn’t there always? If you spread the money thinly, the rewards when one of your companies strikes it really big, will be on the small side. But you can’t have it all ways. I prefer a lot of smaller gains to one big one – and the chance of a nasty loss. But you must make up your own mind. As we all rock on.
Posted by Malcolm Stacey on Aug 26, 07:07 AM in Thought For The Day- Post to: del.icio.us
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So erm, if I buy loads of little stakes its going to take years to recoup my costs, so I guess your article is suggesting we all go for Investment Trusts, funds etc ???
— Colin · Aug 26, 09:55 AM · #