Ever jumped out of an airplane? It’s OK if you have on a parachute. Pretty dumb if you don’t.
Parachute investing is buying an equity with a parachute so you won’t risk all your money or, better yet, give back the profit you have made as the stock or fund went up and then goes down. If you bought that hummer at Rs.100 per share and during the past couple of years seen it go up to Rs.500 you don’t want to give back that nice profit, do you? With a parachute you can save most of it. How?
When you invest in any stock you must know how much you will risk before you buy it and how much of the profit you are willing to give back when it turns down. Take that beauty at Rs.100. Instead of going up it went down. Are you willing to agonize as it drops to Rs.50? If you had a parachute you would have jumped out of the plane before it crashed. If you had an exit strategy for your stock you would have sold it before you lost a big chunk of your cash.
The secret of a safe investment is an exit strategy. When you bought Mr. Hundred Rupees you shook hands and told him I’d like to be your friend, but if you change your name to Ninety Rupees I am leaving. Maybe that that is not very nice, but nice doesn’t cut it in the investment world.
Mr. Hundred Rupees said I am going up and I want you to be my friend. Please follow me and if I falter you can leave and we will part friends. Now that makes sense. You trail along and after it goes to Rs.500 it does falter. Do you know where you are going to leave or are you going to ride it go back down to Rs.100? In other words do you have your parachute on?
That parachute is your continuing exit strategy that is in place every day. In the investment community it is called an open trailing stop loss order. Any broker can put this in place for you. You might be lucky enough to have a broker who knows where to place stops, but unfortunately there are not many of them.
The brokerage industry does not teach its employees (brokers) how to protect customers’ money. If that is the case you might want to use the old standard 10% rule. Have the broker place an open stop every Friday at 10% of the closing price of that day as it closes higher. Never lower the stop loss. Brokers hate this as it makes them work, but that is what they are there for and that is how they earn their commissions.
With your parachute you can always protect your original cash purchase from a big loss and as your stock advances you can lock in profit as the stock advances.
Every investment should have a parachute.
