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Things may be going great for you now, but what happens when the tide turns and you face hard times in the market? Here's how to protect yourself."Recently, I encountered a man who was close to suicidal. Three weeks prior, his Keogh account had been worth about $1.3 million. Unfortunately, as a result of the mini-technology crash in NASDAQ, the value of his account had plummetted, ending up only worth about $400,000 by the time we met. Then, he had watched one stock drop from $200 per share to about $50 per share before he got out of it. It had since that time risen to more than $60 per share. He was upset about getting out, since his advisor was still recommending the stock. That stock, incidentally, had only earned seven cents during the last 12 months. It also was only one of several losers that had plagued his account."
This investor was upset because he had let his family and friends down. He hadn't protected them. However, I pointed out that he had only given back the gains that he had made over the last 12 months; it could have been much worse. Indeed, now he had the opportunity to learn from his mistakes and to make sure he didn't make similar mistakes in the future.
What do you think he did?
Avoiding future disasterAt the end of the day, do a daily debriefing. Ask yourself the following questions: Did I follow my rules? If you did, even if you lost money, then pat yourself on the back. If you did not, then do some more mental rehearsal to be sure you avoid repeating the same scenario.
I think every trader should have to read a warning prior to plunging into any market. The warning should not be as naive as "Past performance may not reflect future trading results." The warning should be much stronger. It should be something along the lines of:Warning! You are biologically and culturally wired to lose a lot of money in the market over your lifetime. While people can prevent this fate by taking the right action both psychologically and systemwise, most people will fail to heed this warning!