FROG IS IN THE POT 
by THE ALCHEMIST, AL THOMAS, 3-28-05

You remember the story about the frog that was put into a pot of cold water on the stove. He was not concerned. Someone lit the burner and the water began getting warm, the frog was very comfortable and as the water became warmer he was so relaxed and complacent that he fell asleep – never to awaken.  Mr. Frog reminds me of today’s stock market investors and that includes all folks with IRAs, 401Ks and the like. Stocks have been slowly rising for the past year and a half (the water is becoming warmer and warmer) and no one is paying any attention to his investment positions. The market is becoming overheated and many investors are about to become boiled. Too many are swimming fat and happy in the increasing warmth with no thought of exit.

Currently the long term market trend is up so complacency reigns supreme. It is doing exactly the same as in 2000. When 2002 ended we had a surplus of boiled frogs. A smart frog will not be lulled to sleep and will have a plan to jump out of the pot. A frog without a plan plans to be frog soup.

There are many ways for the frog to escape and there are many ways for investors to retain their profits or at least not lose their money the next time the market heads down. It will if past performance is any guide to futures results. Any plan to jump out is better than no plan at all.

Whether you own stocks, mutual funds or ETFs (Exchange Traded Funds) you can set a limit as to how much you are willing to lose from this point (that’s now, today).  Any fool (frog) can buy, but it is the wise man (frog) who knows how to sell (escape the pot).

If you want to have money for retirement you must protect your capital from loss with a risk management strategy. First protect your principle and then protect the profits you have made on the recent stock market advance. It is not difficult to do.

                With stocks and ETFs you can place an Open Stop Loss Order with your broker or financial planner. He won’t like this, but it is your money not his. Don’t let him talk you out of it. For regular mutual funds you must have a mental stop and when that price is hit you call your broker (he won’t call you) or the fund directly to tell them to transfer your funds to a Money Market account. Cash is a position.  If you are not familiar with stop loss orders you can find books in your library and there are hundreds of articles on the Internet. See some of my previous articles on my web site.  The water is heating up. Don’t fall asleep and become a poor frog.