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Stop Loss for ETF's

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  • Stop Loss for ETF's

    Would it be wise to utilize stop loss orders to protect my retirement savings from a severe market turndown?

  • #2
    What’s your investing horizon?

    The problem with getting out is that you have to jump back in.

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    • #3
      It's not really a loss until you sell. With all the talk of a possible bear market and the fact that retirement for me is still +22 years away, I'm actually excited for some deals. Obviously, if you need the money now that's a different problem.

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      • #4
        This sounds an awful lot like trying to time the market. Data exists to show this is a very, very bad idea. That said, I do “time the market” by buying dips with excess monthly savings that I accumulate, so I can’t completely poo-poo on you. However, given the data, I don’t play with important chunks of retirement money, which it sounds like that’s the direction you’re heading. It will depend on your age, AA, goals, plans for money when you sell, and plans for getting back in, but without knowing the whole story, I’m advising a hard no here.

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        • #5
          Would it be wise to utilize stop loss orders to protect my retirement savings from a severe market turndown?
          DO. NOT. DO. THIS. It is a strategy for failure.
          Retrain your brain to embrace the downdrafts, to exploit them, to load up with dry powder, to enjoy the ride.

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          • #6
            What if it dips just low enough to trigger the stop loss then rallies because the printer went back on to new highs.

            Select an asset allocation that works for you with a plan and stick to it.

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            • #7
              I'm currently in retirement with a 40 / 60 stock / bond portfolio. My thinking was since I had a 25% return in equities, if the market drops 50% and I can stop my loss when it drops 15% I'm in effect locking in a 10% return.

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              • #8
                Originally posted by delkodds View Post
                I'm currently in retirement with a 40 / 60 stock / bond portfolio. My thinking was since I had a 25% return in equities, if the market drops 50% and I can stop my loss when it drops 15% I'm in effect locking in a 10% return.
                It is a valid risk management technique. Protection against downside loss. Is the price an amount or a trailing percentage?
                You have entered a trading strategy. The goal here is you have a trade, one of many. Limit the loss and exit. The trader also has position sizing (multiple trades) and a plan for a new trade. Sometimes an upside exit limit as well. The stop loss triggers a market sell order. You can sell it lower if the market has moved.
                The real question is the next trade. What are you buying and at what price? A trader has a plan, and sizing and another buy with another stop loss order. 5 in a row cutting losses and the hope the the winner covers the small losses and makes money. Every trading system works until it doesn’t.
                My take, you don’t want to become a trader with 40% of your portfolio. Now you have cash. What is your next trade? Another 15% stop loss?
                Short version, Trading requires gains for a stop loss strategy to work. Typically individual stocks, not indexes.
                I think you will be in cash when the gains occur. Do not try this with your whole retirement portfolio. Day trading, technical trading, momentum trading increases your risk tremendously. You have to pick the winners for the next round. Disaster for an investor but it how a trader makes money. Very few do short term and long term it is virtually impossible.

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                • #9
                  Thanks Tim, An excellent response. I have enough fixed income to ride a market downturn without having to sell any equities. Guess I'm along for the ride.

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                  • #10
                    I would also be careful about the tax man with this type of strategy. I've got a lot of long term gains in these ETFs. Any sale triggered by a stop loss would just leave me with a pile of cash and a big capital gains bill.

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                    • #11
                      Originally posted by CordMcNally View Post
                      What’s your investing horizon?

                      The problem with getting out is that you have to jump back in.
                      This^^^

                      I see noting wrong with stop loss, but you need to then start nibbling back in while the market is "crashing." Most of the people who are most attracted to stop loss are the type who will also miss the upswing. Limit orders are also susceptible to bad ticks, so that's a real problem if your auto-order dumps a large quantity for no reason.

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