Friday, October 17, 2008

When the market crashes

When the stock or the forewx market goes down, the rule for the trader or the dealer is to cut his losses; never to hang on to his position with the fond hope that the market will turn, and he can recoup his losses. He is always advised to liquidate his position and get out as fast as possible. (The benefit that he gets is to sit on cash, and be able to buy back at a lower price.)

In contrast, I have not seen an investor being given similar advice. When the market begins to fall, he is told to "stay invested". The poor chap sees the value of his assets crash, rue the opportunity to buy at a dirt cheap price because he has no liquidity, but only pray for a recovery. If the market recovers to the former levels, he is back to square one, but no better. Why shouldn't an ordinary investor (say in stocks, mutual funds) have a stop-loss point too?

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