Editor's note: Set emotion aside and look at the facts...

Recent market volatility has investors nervous about how to handle their money right now. Most investors assume they can hold onto stocks that are currently struggling until today's bullish sentiment sparks a reversal.   

But according to Retirement Millionaire editor Dr. David "Doc" Eifrig, if you don't have a plan for when to sell, you could lose all your gains and then some...

In today's Masters Series, adapted from the August 2 and July 31 issues of the Health & Wealth Bulletin, Doc explains why you need an exit plan in place every time you buy a stock... 

Don't Be 'Emotional' With Your Investments

By Dr. David Eifrig, editor, Retirement Millionaire

Every great athlete has one thing in common...

They hate to lose – more than anything else in the world.

Take Davante Adams. Adams was once the star wide receiver for the Green Bay Packers, catching passes from the great Aaron Rodgers. (Adams now plays for the Las Vegas Raiders.)

In a recent podcast, Adams was asked about the day he was drafted into the NFL. Most folks would look back at that day and reminisce about the incredible achievement. But not Adams.

He was instead focused on the eight wide receivers drafted before him. He named all eight players and their correct order in the draft off the top of his head.

He didn't consider it a win that he was drafted and was paid a small fortune. Instead, it was a loss that other guys were picked before him. And he hated that feeling of losing.

Investors and traders are no different. The losses that we take hurt much more than the good feeling a win will bring.

This is what's known as "loss aversion."

We've all held a stock that's headed down. And we've all – at some point or another – kept holding, hoping to break even. "If it could just get back to my buy price, I would sell and move on."

That whole time, you've got your capital tied up in a stock that the market has soured on. Meanwhile, other stocks are shooting up left and right.

Believe me, the dollars you earn by "getting even" are no more valuable than the dollars you'd earn by switching to the stock of a better business.

You should cut your losses and move on... But many investors simply can't do that. They become emotional with stocks that turn into losers.

It's not just you. It's built into our brains. And it's hard to let go...

In a study by Terrance Odean of the University of California, Davis, an analysis of 10,000 individual brokerage accounts found that investors held losing stocks for a median of 124 days versus a median of 102 days for winning stocks.

We're too quick to sell winners lest we give back some of our gains. And it costs us money.

Good investors have to stay rational in the face of a down stock... But we're humans first, investors second. We simply can't be trusted to keep our emotions in check.

It's one of the biggest traps in investing... one that too many of us fall victim to.

It's called the sunk-cost trap, and it may be the most dangerous trap of all. It's when a person will continue with something just because of the money, time, and effort that has been invested in it – rather than considering whether it's still the best idea.

We've all done it...

We've all bought a movie ticket, sat down in the theater, and then realized halfway through that it's a terrible movie. But we made it this far and we've already paid for it... so might as well finish watching the movie.

Or we keep clothes in our closet that we know we're never going to wear since we already spent the money on them.

And, of course, the sunk-cost trap happens when we buy a bad stock and refuse to sell it. Even when it's obvious we're wrong as we see shares plummeting. We remain committed to the investment. And, worse still, we often put more money into the loser, thinking: "It has to go back up eventually."

This is easier said than done, but... know when to cut your losses.

Emotions make cutting your losses so hard to do. That's why I usually recommend investors use some sort of exit strategy to combat the sunk-cost trap and other costly mistakes.

The bottom line is that investing is hard... Don't make it harder.

Right now, we're nearly two years into a bull market, and it feels like it could go on for much longer. But the truth is that markets always fall sometimes. Some declines are small corrections – say 10% or so – and some are huge... cutting your portfolio in half.

You want to be prepared before the major drop hits. You're not going to board up your windows when you're already in the middle of a hurricane. So why wouldn't you treat your finances with the same mindset of preparedness?

This is why you need to have an exit plan in place every time you buy a stock. One of my favorite tools is the stop loss: a predetermined point where you promise yourself to sell, no matter what.

My team and I typically use a 25% hard stop for stocks that we want to own for a long time.

All a 25% hard stop means is that if the stocks fall 25% below your purchase price, you sell. No questions asked.

For example, if we buy a stock at $10, we'd sell that stock if it fell below $7.50. That limits our loss to 25%.

There are more intricate ways to limit your losses... You can use a "trailing stop," which adjusts higher as the stock price rises.

Today, I see the need to have an exit plan in place for your portfolio. I've previously written about how nervous I've become for a big pullback in the market.

Having a stop loss in place will help limit the hurt when the downturn finally arrives...

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team

Editor's note: On Tuesday at 9 a.m. Eastern time, we're broadcasting a special 25th-anniversary message. It's something we haven't spoken about publicly in three years. But with the markets set to remain volatile, it's the No. 1 way to prepare for what's ahead... and to unlock the highest level of research our firm has to offer.

This briefing is free to attend online. So make sure you reserve a spot to watch ahead of time... Save your spot right here.