Ever jumped out of an airplane? It’s OK if

you have on a parachute. Pretty dumb if you don’t.

Every buy any stocks, mutual funds or Exchange

Traded Funds? It’s OK if you know how much you

are willing to risk. 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 $12 per share and

during the past couple of years seen it go up to

$52 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 of fund 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 $12. Instead of going up it went down. Are

you willing to agonize as it drops to $5? 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. Twelve Dollars you

shook hands and told him I’d like to be your

friend, but if you change your name to Ten

Dollars I am leaving. Maybe that that is not

very nice, but nice doesn’t cut it in the

investment world.

Mr. Twelve Dollars said I am going up and

I want you for 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 $52 it does falter. Do you know where

you are going to leave or are you going to ride

it go back down to $12? 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.

Source by Al Thomas