IFB03: Doesn’t a Stop Loss Contradict Buy and Hold?
The Investing for Beginners Podcast - Your Path to Financial Freedom - Podcast autorstwa Andrew Sather and Dave Ahern
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When you are looking for advice on how to buy stocks, you will find thousands of articles on the internet. All of them touting the various ways to buy stocks to make money. But what about selling a stock? Crickets. There is not much out there to tell you when to sell. Having an exit strategy when you sell is almost as important as your buy strategy. This is where having a stop loss is so vital to your success. What is a stop loss? It is a set point that you establish as your base point for selling a stock if it starts to fall. The best advice I have seen is setting the stop loss at 25%. Setting the stop loss point here helps eliminate some of the guesswork. And it avoids any impulse sells in a case of sudden movement down.
In today’s session, we will discuss the stop loss and much more.
* Setting Trailing Stops
* Yahoo Finance for Stop-Loss alerts
* Portfolio maintenance
* Selling stocks to limit your portfolio to 25 stocks or less
* Best strategy to buy stocks, dollar amount or share amount
* Dividend reinvestment program or DRIPs explained
* Lump sum investing or dollar-cost averaging
* Investing outside the US
How do you set a trailing stop? Do you do it with the brokerage or on your own?
Andrew: There are lots of different trades that a broker will offer. A very common one that you might have seen was the stop-limit. What that is basically, you put in whatever you want the price to stop-limit to trade into. And once the stock hits, and in some cases, it doesn’t even need to hit it exactly. The broker will prioritize all their different trade orders. And when it gets close to that price it will execute that trade for you.
When I refer to the trailing-stop in my eletter it’s something I actually don’t recommend inputting to the broker.
For several reasons because the broker will choose buys and sells. You will see this all the time with your broker. Say for example you put in a buy order for $45. And when you look at the actual trade a day later it won’t match the $45 exactly. It will depend on how many shares you buy, who is on the other side of the trade.
There are a lot of things that go into making a trade that we don’t know see because everything is basically on the computer now. But there is always a buyer or a seller that is on the opposite side of your trade. So your broker isn’t always able to make that a one for one exchange. So what they will do with a stop limit. And how that can be problematic if you are putting that into your brokerage account is that they may execute a trade that is not at the price you wanted.
Another thing too is things like flash crashes can activate those prematurely.
I like to recommend putting a trailing-stop in at end of day prices. Because we have seen in 2010 where there was a computer glitch that had to do with the high-frequency trading algorithms. And they caused the stock market to crash at a very accelerated rate in a very short period of time. So if you have stops into the broker they are going to execute those and that’s not what we are trying to do.
The approach I try to preach is a long-term approach. When the media likes to demonize high-frequency trading. And make you feel like the stock market is rigged against you. But, really the people that don’t get affected by those are the people that hold for the long-term.
So we are going to try to hold for the long-term. And put a trailing stop on it. And the way that I do it is to put an alert on
