Why Bother Having a Stop Loss With ETFs?
April 20th, 2009 at 1:00pm by Tom Lydon
When it comes to exchange traded fund (ETF) investing, do you have a strategy that you follow no matter what the market throws your way?
When you hold a position and it’s in a long-term uptrend, you don’t have to think about selling it. But what about on the downside – is there a point at which you’d let go? Having a stop loss (and sticking to it) is one of the most important things an investor can do.
Dr. Steve Sjuggerud for Daily Wealth notes the importance of a stop loss. While investors want to be part of uptrends, especially long ones, at some point when the trend reverses itself (all trends come to an end sooner or later), those investors will want to protect their gains and limit their losses. Stop losses can assist with this.
Entry and exit strategies remove the emotional aspect of investing, which often shows itself in the form of rationalization. Thoughts such as “If I sell now, it could come back” are the bane of many investors. But having strategies dictates that if a stock or fund is not “working,” then you get rid of it and don’t give it another thought. Knowing that there’s a cap on how much you can lose can be reassuring to investors.
Trailing stops are a way to take the emotion out of investing, and gives you a discipline to follow so that you are in the market when the time is right and get out of the market before your losses are overwhelming.
While Sjuggerud uses a 25% stop-loss, ours is set at 8%. Anything higher than that would be too much loss to take, while anything lower than that would mean selling more frequently.
By having an exit strategy, your decisions will have reason and definition behind them and there will be no confusion for you.
Do you have a stop loss? Discuss your strategy for selling in our forums.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.