Cut your losses and let your profits run

A falling share price causes doubts. Will you sell immediately at a limited loss? Or will you take a risk and wait for a possible turnaround? Many investors opt for the second scenario. When prices rise, the opposite tends to happen: many investors like to cash in before the price starts to fall again. A stock market adage that is more than two centuries old suggests turning the tables.

In layman's terms

Cutting your losses and letting your profits run simply means:

• Stop what isn't working in time to avoid bigger losses.
• Keep investing in what is going well for longer to reap the maximum benefits.

In other words: take rational decisions rather than emotional ones. This rule helps investors to keep a cool head and avoid losing out due to stubbornness or false hope.

Who said it first?

This piece of stock market advice is a true classic. It is attributed to British political economist David Ricardo, who lived from 1772 to 1823. Ricardo quickly realised that emotion is often at odds with returns. Later on this advice was taken and further propagated by investors such as Jesse Livermore, Richard Dennis and William O'Neil. After more than two hundred years, his insights remain surprisingly relevant.

Is that really how the stock markets operate?

The reason why cutting your losses and letting your profits run hasn't lost any of its relevance is because investing is still about combating your emotions, perhaps now more so than ever before.

Stopping immediately when you lose is like admitting you were wrong. And seeing gains feels good, even if you are missing out on more significant gains. This stock market adage aims to give investors peace of mind: those who accept losses swiftly and have the confidence to hold on to strong shares may achieve better long-term results.

Melexis: slow and steady wins the race

Those who placed their trust in the IPO of Belgian developer of semiconductors and sensors Melexis back in 2010 saw that trust pay off ten years later. The share price went from 10 to 12 euros in 2010 to more than 102 euros at the end of 2021. Those who kept believing in the larger trend saw their patience rewarded after a few minor dips along the way.

Is it worth a try?

Admittedly, this approach requires a great deal of discipline, but it's worth considering. It sounds easier than it actually is, but it does make your investments more conscious and rational.

Expert insight: "Only invest in the shares you believe in"

Pascal Paepen is a Banking & Stock Exchange lecturer at KU Leuven, teaches at Thomas More University of Applied Sciences and co-founded investor website Spaarvarkens.be. As a former banker, he now uses his expertise to help people make the transition to investing.

"At the beginning of my investment career, I often took profits too quickly, but today I realise that this was completely counterproductive. Why would I sell stocks when they are performing well and the fundamentals remain sound? If the trend is right, just let them run. Many investors make the mistake of selling winners quickly whilst holding on to losers or stocks that are treading water, either out of stubbornness or hope."

"That's a shame. If you no longer believe in a share, sell it immediately and invest the money in something better. Because the opportunity cost is real. Ultimately, an investor can be left with a portfolio full of bad shares after selling all the good shares. Invest with common sense, assess the quality and don't be obsessed with daily prices. As Warren Buffett says: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

"That's why you should keep a close eye on the movements around companies, but you also need to look at the bigger picture. If you have Apple or Microsoft shares and you see them fall by 10%, the price will come back up again. If you speculated by buying shares in a start-up or scale-up that is researching a ground-breaking drug, but has just seen its funding suddenly dry up, the alarm bells should start ringing."

Peloton's fall after the coronavirus pandemic

In 2019, the opening trade of Peloton Interactive, a manufacturer of modern digital workout equipment, was 27 dollars per share. Its share price grew rapidly in 2020, when loads of people started exercising at home during the coronavirus pandemic. At its peak in early 2021, it even reached 170 dollars.

However, after the lockdown was lifted, demand came to a complete standstill and the share price began to plummet. Those who sold their shares in time achieved a huge return, but those who held out hope for a recovery suffered heavy losses.

What should you bear in mind as an investor if you're just starting out?

Running your profits and cutting your losses sounds like a logical policy. However, it takes quite a bit of practice in real life. You can make things easier for yourself with the following potential tools and tactics:

1. Use limits and strategies

Be aware of the potential risks associated with investing from the outset. Make the necessary plans in advance and stick to them. Decide in advance at what point you will sell a share, for example, if it falls by 10%.

2. Use stop-loss orders

Consider using (trailing) stop-loss orders. These allow you to automatically sell your shares when they reach a certain floor price.

In the case of trailing stop-loss orders, this lowest point moves up with the market price when it increases. Suppose you buy a share for 10 euros, and you set an order to sell at a loss of 2 euros. If the share is suddenly worth 15 euros, the order will only be executed when the share falls to 13 euros.

3. Train your trend eye

Don't let the slightest fall in price deceive you. Another old adage from this e-book says: "the trend is your friend". Always keep an eye on the bigger picture at all times to keep making well-informed decisions.

4. Keep a diary

It may sound a little strange, but a personal investment diary can help you make the right, rational decisions when you are in doubt. Write down why you are buying or selling certain shares and what you might do differently next time.

ASML's years of growth – and sudden decline

Dutch company ASML manufactures advanced machines that make computer chips. Its share price has shown a clear upward trend since 2010. In 2012, the share price hovered around 40 euros, and in 2024 it briefly reached a peak of just over 1,000 euros. In the following months, the price experienced a sudden sharp decline. Investors who held on to their shares long enough and didn't sell too early benefited from this significant increase in value. Those who placed too much trust in the share after its peak suddenly had to take a heavy loss when selling.

From stock market wisdom to life wisdom

Cutting your losses and letting your profits run may sound simple, but it is anything but. This stock market adage may give you more peace of mind and guidance as an investor, but an excellent understanding of stock market trends and good timing are crucial to getting the most out of your stock market adventure. As is often the case, practice makes perfect, particularly here.