The flash crash demonstrated that stop loss orders are often harmful to investment portfolios. Many investors with executed stop loss orders were harmed that day.
Value Investing and the Stop Loss Order
Personally I think the stop loss order should be avoided by the value investor. If I buy a good company at a reasonable price, and it gets cheaper, I will reevaluate my buy decision because I want to feel comfortable that it is not a value trap. But unless, something has fundamentally changed I would be apt to buy more, not sell.
Selling after a stock has fallen in price should only be done because something has changed or you have reason to believe you made a mistake. It does not make sense to sell because the investment has fallen an arbitrary predetermined amount.
Lesson: Avoid the pitfalls of a stop loss order. If the investment price has decreased, and the margin of safety increased, you should consider adding to your position in that investment.
This article was republished with permission from Arbor Investment Planner.