The Necessity of Profit/Loss Plans

Investment planning. The thought sends shivers down the spines of many an investor. In fact, many don’t even want to think about it and will gladly pay someone else to do that for them. However, taking a hands-on approach to your investments provides an extra surety against incurring extensive losses in the event that an investment goes sour. It also drastically diminishes the likelihood of falling victim to financial losses at the hands of someone looking to take advantage. Having a profit/loss plan in place will help investors take control over their investments.

Profit/loss plans: What are they?

Profit/loss plans provide investors with an overarching set of limits that serve to determine the maximum loss or gain an investor might experience on a certain stock. It is especially important for investors to learn how to contain losses and learning from past losses is crucial for preventing them in the future.

Making a Plan

Investors first need to draw some lines in the sand, before setting out making a profit/loss plan. More than just setting a limit on losses (the easy part), investors must also set a limit on total gains (the hard part). Most investors will start hearing the “caa-ching” of cash registers at the potential of high gains on an investment, but reservation is vital for smart investing. Don’t get carried away. Investors must also be careful not to devise a profit/loss plan meant to be applied to all investments in a portfolio. Just as investments differ, so to should profit/loss plans that account for them.

Putting Your Plan in Place

Once you have determined benchmarks for gains and losses and identified risk factors, it is time to put your plan into place. It is important to remember that stock-brokers will not allow one security to have two different sell orders entered on it. You must decide what is in your greater interest to protect; gains or losses. Most investors would put loss prevention over gains and, in this case, will apply stop-loss orders. Stop-loss orders are standing orders directing brokers to sell a stock once it gets to your predetermined maximum-loss benchmark (remember, from your profit/loss plan?). Alternatively, if your stock ends up appreciating and comes within reach of your maxim-gains benchmark, you can simply change the price on your stop-loss order enabling an immediate sale of your stock.

Staying Disciplined

Investing is all about keeping a clear head and being conservative–which may prove difficult given man-kind’s penchant for acquiring wealth. It is important to stay disciplined in adhering to your profit/loss plan and, despite what that voice in the back of your head tells you, it is better to be safe than sorry.