I know stop losses are very important for managing risks.

I would like to buy shares that I plan to hold for at least 5-10 years.

Should I consider putting a stop loss on these stocks? If so, how would I go about deciding what is a realistic stop loss? The stocks I'm buying will be a range of mature blue chip stocks paying high dividends or ETF index stocks.

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    Last I checked, you buy when it's low, not sell! :-) – corsiKa Sep 21 '16 at 19:45
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    @corsiKa - no you buy when the price is heading up not when it is falling down. – Victor Sep 21 '16 at 22:10
  • @Victor That much is true, but you still would want to buy when the price is as low as possible would you not? IE: Catch the raise just as it begins? – Ranma344 Sep 22 '16 at 13:14
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    @RCarpenter - you would wait for confirmation that the downtrend is over and a new uptrend is beginning - see my comments regarding this below. – Victor Sep 22 '16 at 13:22
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    Joe.E - I hope you ignore the negativity in most of the answers and comments in this post and stick to your guns in using stop losses. Do your own research and don't listen to strangers on the net. Here are 2 articles to get you started: The Stop-Loss Order - Make Sure You Use It and Investing in Stocks and The Stop Loss - good luck. – Victor Sep 24 '16 at 0:25

If they are truly long term investments I would not put a stop loss on them. The recent market dive related to the Brexit vote is a prime example of why not to have one. That was a brief dive that may have stopped you out of any or all of your positions and it was quite short lived. You would likely have bought your positions back (or new positions entirely) and run the risk of experiencing a loss over what turned out to be a non event.

That said, I would recommend evaluating your positions periodically to see if they still make sense and are performing the way you want.

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    So what kind of stops would have taken you out? I had stops on all my longer-term position and did not get stopped out of any of them during this time. – Victor Sep 21 '16 at 22:39
  • @Victor it would depend on how close an investor was maintaining a trailing stop order. If you didn't get stopped out congrats, that is good. For those that did the market recovered fairly quickly and there is a good chance they lost money – homer150mw Sep 21 '16 at 23:26
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    Well if you are using a 5% or 10% trailing stop on something you consider long term then you should really be looking at your strategy, because you would be using short term stops for long term positions, it's never going to work. For any position you aim to hold for longer than 12 months you should not be using a trailing stop less than 20%. – Victor Sep 22 '16 at 2:30

Stop loss orders are the exact opposite of what you should be doing if you are implementing a long term buy-and-hold strategy. The motivation of a buy-and-hold strategy is that in the long term, the market rises even despite the occasional crash or recession. Setting a stop loss simply increases the probability that you will sell for a low price in a temporary market downturn. Unless you are likely to need near-term liquidity (in which case you're not a long term investor), that makes no sense.

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    A stop loss protects your profits or limits your losses, much better than lossing 50% or more of your capital in a situation like what happened in 2008. – Victor Sep 21 '16 at 22:42
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    @Victor If you're not going to touch the money for 5-10 years, what does it matter if it's down 50% this month? – Kaz Sep 22 '16 at 8:27
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    @Kaz - for 2 reasons, firstly if it falls by 50% how long will it take to recover just to breakeven, and secondly what happens if the month it falls 50% is just before the end of the 5 or 10 years you planned to hold the investment for? – Victor Sep 22 '16 at 10:59
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    The whole point of a "buy and hold" strategy is that it doesn't matter. You can't predict the market. You don't know if that 20% drop means the market will drop even further tomorrow, or immediately bounce back. So you just buy it and ignore market movements, trusting that, over time, it will end up ahead. (for reference, if you bought the S&P at the peak before the great recession, it would still be up over 70% today). – Kaz Sep 22 '16 at 11:33
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    If you get 7 years into a 10-year holding period, then you don't have a 10-year holding period anymore, you have a 3-year holding period, and you should adjust your risk profile accordingly (less equities, more bonds). – Kaz Sep 22 '16 at 11:34

Do not use a stop loss order as a long-term investor. The arguments in favor of stop losses being presented by a few users here rely on a faulty premise, namely, that there is some kind of formula that will let you set your stop such that it won't trigger on day-to-day fluctuations but will trigger in time to protect you from a significant loss in a serious market downturn. No such formula exists. No matter where you set your stop, it is as likely to dump you from your investment just before it begins climbing again as it is to shield you from continued losses. Each time that happens, you will have sold low and bought high, incurring trading fees into the bargain. It is very unlikely that the losses you avoid in a bear market (remember, you still incur the loss up until your stop is hit; it's only the losses after that that you avoid) will make up the costs of false alarms.

On top of that, once you have stopped out of your first investment choice, then what? Will you reinvest in some other stock or fund? If those investments didn't look good to you when you first set up your asset allocation, then why should they look any better now, just because your primary investment has dropped by some arbitrary[*] amount? Will you park the money in cash while you wait for prices to bottom out? The market bottom is only apparent in retrospect. There is no formula for calling it in real time.

Perhaps stop loss orders have their uses in active trading strategies, or maybe they're just chrome that trading platforms use to attract customers. Either way, using them on long-term investments will just cost you money in the long run. Forget the fancy order types, and manage your risk through your asset allocation. The overwhelming likelihood is that you will get better performance, and you will spend less time worrying about your investments to boot.

[*] Why are the stop levels recommended by the formulae invariably multiples of 5%? Do the market gods have a thing for round numbers?

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    What formulae are you talking about? The simplest type of stops are based on a % below the high. You would use round numbers simply to keep things simple, and you would do backtesting with your stops. You could always do some curve filling with your backtesting and find that 18.8% works the best, but it will only be the best for the period back tested. It would be better to use 20% in that case. You could also set your stops based on the volatility of each instrument, the more volatile the wider the stop the less volatile the narrower the stop. – Victor Sep 22 '16 at 13:42
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    I'm talking about formulae like the ones you just described. There is no evidence to suggest they improve long-term returns, particularly when used in a passive investment strategy. I'm skeptical of the role of backtesting. Maybe it's because I started my own investing career with the "Dogs of the Dow," a well-backtested, but ultimately worthless investing strategy. Examples of backtested strategies that failed are legion. As for the round-numbers comment, it was mostly tongue in cheek, but also meant to suggest that perhaps these percentages owe more to superstition than to rigorous analysis. – Nobody Sep 22 '16 at 14:37

The only time I've bothered with stop orders is when I think the position is in a particularly volatile state and there is an earnings report pending. In this situation it's an easily debatable thing to do. If I'm so concerned that the earnings report will be enough to cause a wild downswing that I'd place a stop order, maybe I should just drop the position now.

I subscribe to the school of thought that you don't sell your MVPs. I've bought a few things on a whim that really performed well over the few years to follow. To me it doesn't make sense to pick a return at which I would turn off the spigot. So generally it doesn't make sense to hold orders that would force a sale, either after some upside or downside occurs.

Additionally, if I've chosen something as a long term hold. I never spend all my cash opening up a position. I've frequently opened positions that subsequently experienced a decline, when that happens I buy more.

Meaningless side thought: With the election coming I've been seriously considering pulling some of my gains off the table. My big apprehension with doing that is that I have no near-term alternative use for the money. So what's the point of selling a position I'm otherwise comfortable with just to pay taxes on the gain then probably buy back in?

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My broker offers the following types of sell orders:

  • Market
  • Stop Market
  • Trailing Stop %
  • Trailing Stop $
  • Limit
  • Stop Limit

I have a strategy to sell-half of my position once the accrued value has doubled. I take into account market price, dividends, and taxes (Both LTgain and taxes on dividends). Once the market price exceeds the magic trigger price by 10%, I enter a "trailing stop %" order at 10%. Ideally what happens is that the stock keeps going up, and the trailing stop % keeps following it, and that goes on long enough that accrued dividends end up paying for the stock. What happens in reality is that the stock goes up some, goes down some, then the order gets cancelled because the company announces dividends or something dumb like that.

THEN I get into trouble trying to figure out how to re-enter the order, maintaining the unrealized gain in the history of the trailing stop order. I screwed up and entered the wrong type of order once and sold stock I didn't want to.

Lets look at an example.

a number of years ago, I bought some JNJ -- a hundred shares at 62.18. - Accumulated dividends are 2127.75 - My spreadsheet tells me the "double price" is 104.54, and double + 10% is 116.16. - So a while ago, JNJ exceeded 118.23, and I entered a Trailing Stop 10% order to sell 50 shares of JNJ. The activation price was 106.41. - since then, the price has gone up and down... it reached a high of 126.07, setting the activation price at 113.45. - Then, JNJ announced a dividend, and my broker cancelled the trailing stop order. I've re-entered a "Stop market" order at 113.45. I've also entered an alert for $126.07 -- if the alert gets triggered, I'll cancel the Market Stop and enter a new trailing stop.

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  • Note that stopping on a gain is different than stopping on a loss; not sure if this directly answers the OP's question. – Grade 'Eh' Bacon Sep 21 '16 at 18:24
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    Trailing stops can still result in selling a holding due to a freak movement in price. I agree with having targets but if the asset is really a long term holding it is probably better to sell it based on evaluation and intentional action instead of an arbitrary price change that may be meaningless. – homer150mw Sep 21 '16 at 19:02
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    How many assuptions are made in your evaluation? These assumtions are mainly based on your bias (or someone else's bias) of the stock and the markets. This means that your evaluation is partly based on emotion. In relying purely on price action there are no emotions involved, it is purely fact - something that has actually happened. So by having a definition of what is up and what is down based purely on fact, and by letting the market determine when it is time to get out, based on these facts, instead of your emotion, you will benefit in the long run. – Victor Sep 23 '16 at 1:31
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    Not a bad answer based on your own experience, don't know why someone voted you down, but a +1 from me. – Victor Sep 23 '16 at 1:33
  • I have to agree... I didn't give a direct answer to the question, instead I suggested another way at looking at the problem, based on what I do. Victor, I would disagree about your assessment. I have one standard formula that I apply across the board. The goal is to get the principal out and hold the remaining stock outright -- "free stock" if you will. So I would argue that using this method, and applying it regardless of how I feel about a particular stock does take the emotion out. We do adjust the rule as we learn things. I probably have the tax percentage too high. – Michael Sep 24 '16 at 17:16

This is the exactly wrong thing to do especially in the age of algorithmic trading. Consider this event from 2010:

enter image description here Chart Source

Another similar event occurred in 2015 and there was also a currency flash crash in that year.

As you can see the S&P 500 (and basically the entire market) dropped nearly 7% in a matter of minutes. It regained most of that value within 15 minutes.

If you are tempted to think that 7% isn't that big of a deal, you need to understand that specific securities will have a much bigger drop during such events. For example the PowerShares S&P 500 Low Volatility ETF (SPLV) was down 45% at one point on Aug 24, 2015 but closed less than 6% down.

Consider what effect a stop loss order would have on your portfolio in that circumstance. You would not be able to react fast enough to buy at the bottom. The advantage of long-term investing is that you are immune to such aberrations.

Additionally, as asked by others, what do you do once you've pulled out your money. Do you wait for a big jump in the market and hop back in? The risk here is that you are on the sidelines for the gains. By missing out on just a small number of big days, you can really hurt your long-term returns.

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    @JimmyJames, so how would this affect someone with a stop at 20%, they would still be in the market. Also the date this happened was 6th May 2010, and the market fell further in the weeks after that day. – user9822 Sep 23 '16 at 14:47
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    @MarkDoony knowing what has happened in the past, you can easily cherry-pick a bunch of arbitrary stop loss percentages that would have spared you in each scenario. For example, if you could have had a 50% stop-loss on SPLV on Aug 24, 2015. But what number do you pick for the next time? 20%? 50%? 75%? What's the right answer? Where's Kreskin when you need him? – JimmyJames Sep 23 '16 at 14:54
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    @MarkDoony Another way to think about it is that the stop loss the same kind of effect that table limits on roulette have on a common but naive strategy. People thing that they can bet on black (or red) and double the amount every time they lose. Eventually they will win and re-coup their losses. It's a (mostly) sound idea until you consider the table limit. It seems unlikely that you'll lose that enough times in a row but it eventually happens and your losses are locked-in. Long-term, the market will recover. If you doubt that, you should be investing in beans, guns, and water, not stocks. – JimmyJames Sep 23 '16 at 15:23
  • @Victor If you want to do some reading yourself, try these: Why I stopped using stop loss orders and Why I Quit Using Stop Loss Orders. Long-term investing is not about focusing on random price gyrations. If you are in a stock for the short-term they make perfect sense but not for long-term investments. – JimmyJames Sep 25 '16 at 17:42

The emphasis of "stop loss" is "stop", not "loss". Stop and long term are contradictory. After you stop, what are you going to do with your cash? Since it's long term, you still have 5+ years to before you use the money, do you simply park everything in 0.5% savings account?

On the other hand, if your investment holds N stocks and one has dropped a lot, you are free to switch to another one. This is just an investment strategy and you are still in the market.

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    @victor If you can accurately call when a market/stock has bottomed out and is about to begin climbing again, you should start a hedge fund and become a billionaire. If you can't accurately call what a stock/market is going to do immediately after your stop loss is triggered, then it is of no use to you. – Kaz Sep 22 '16 at 11:37
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    @Kaz - the definition of an uptrend is higher highs and higher lows, the definition of a downtrend is lower lows and lower highs. On a weekly chart - a downtrend ends and a new uptrend begins once a new higher high followed by a new higher low occurs. These are the definitions, there is no bias in them, no subjectivity, and no changing of parameters to curve fit, because they are based purely on price action. That is how you know the bottom has been reached. You could have known that the S&P500 hit a low in March 2009 by 24th July 2009 and thus started to invest after that date. – Victor Sep 22 '16 at 12:37
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    @Victor Except that in between the time when the market bottomed (March), and the time you would have invested (July), the market went up by 25%. Which you would have missed out on. – Kaz Sep 22 '16 at 13:15
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    @Victor Just to restate the obvious: If you can accurately predict which way the market is going to move, then you should start a hedge fund and become a billionaire. Seriously. – Kaz Sep 22 '16 at 13:17
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    @kaz - let me see, you are not worried about holding onto investments that go down by 50% or more but are concerned about missing out on 25% on the way back up even though you would have made 125% over the next 7 years. You do realise that if you lose 50% of your investment you then need to make 100% just to break even. The most important thing in investing is to protect your existing capital. – Victor Sep 22 '16 at 13:32

Patience is the key to success. If you hold strong without falling to temptations like seeing a small surge in the price. If it goes down it comes up after a period of time. Just invest on the share when it reaches low bottom and you could see you money multiplying year after year

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You should definately have a stop loss in place to manage your risk. For a time frame of 5 to 10 years I would be looking at a trailing stop loss of 20% to 25% off the recent high.

Another type of stop you could use is a volatility stop. Here the more volatile the stock the larger the stop whilst the less volatile the stock the smaller the stop. You could use 3 or 4 x Weekly ATR (Average True Range) to achieve this.

The reason you should always use a stop loss is because of what can happen and what did happen in 2008. Some stock markets have yet to fully recover from their peaks at the end of 2007, almost 9 years later. What would you do if you were planning to hold your positions for 5 years and then withdrawal your funds at the end of June 2021 for a particular purpose, and suddenly in February 2021 the market starts to fall. By the time June comes the market has fallen by over 50%, and you don't have enough funds available for the purpose you planned for.

Instead if you were using a trailing stop loss you would manage to keep at least 75% of the peak of your portfolio. You could even spend 10 minutes each week to monitor your portfolio for warning signs that a downtrend may be around the corner and adjust your trailing stop to maybe 10% in these situations, protecting 90% of the peak of your portfolio. If the downtrend does not eventuate you can adjust your trailing back to a higher percentage.

If you do get stopped out and shortly after the market recovers, then you can always buy back in or look for other stocks and ETFs to replace them. Sure you might lose a bit of profits if this happens, but it should always be part of your investment plan and risk management how you will handle these situation.

If you are not using stop losses, risk management and money management you are essentially gambling. If you say I am going to buy these stocks and ETFs hold them for 10 years and then sell them, then you are just hoping to make gains - which is essentially gambling.

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    In your example if you needed the funds in June of 2021 you should have been reevaluating your portfolio long before February 2021 and you should not have it all invested in assets for long term investing because your goals are no longer "long term" – homer150mw Sep 21 '16 at 23:22
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    you should be monitoring your portfolio at least annually but every 6 months would be better. With a "long term" goal only 4 months away as in your example you should have been moving money to less risky investments several evaluations prior to February 2021. If you still had all of it in assets that are more volatile 4 months before needing them and the shit hit the fan you apparently didn't do a very good job in your asset management. Are the positions you have appropriate for your time frame? Positions appropriate for a 10 year goal may not be good for 4 months. – homer150mw Sep 22 '16 at 11:03
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    ok I'll bite. Let's say you have a 25% trailing stop and in 2008 you get stopped out. Now what? When do you buy back in? Do you wait for a 10% recovery? 50% recovery? 75%? I'm assuming your crystal ball is broke just like mine so how do you know when to get back in? If your goals are really long term you should still be putting money into your investments in 2008 and lowering your average cost. Yeah, it sucks the market went down but if your goals then were really long term and you didn't panic sell you should be doing ok now. – homer150mw Sep 22 '16 at 13:06
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    @homer150mw - if I was investing long term in the US market, based on the S&P500, I would have started to get back in after 24th July 2009. This is based purely on price action and the definitions of an uptrend and downtrend. On the weekly chart of the S&P500, price made a new higher low on the week ending 10th July 2009 and then a new higher high on the week ending 24th July 2009. So I would have started investing the week after, as by definition, this is the start of a new uptrend. – Victor Sep 22 '16 at 13:19
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    The S&P 500 is up 50% since it's top of the market in 2008 (May 1st). – JimmyJames Sep 23 '16 at 14:23

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