A stop loss is a strategy to try to limit your stock losses. If you buy a stock for $20, you can enter an $18 stop loss so if the market tries to melt down your loss is limited to 10%.
This sounds safe, but there are common risks that can occur after choosing to implement a stop loss.
First, markets historically have 10% drops, at least annually. So, is it smart to dump all of your stocks once a year? No. The stop loss is to protect you from the “big” 40%+ drops, but those drops start out the same as a 10% drop. They are indistinguishable.
The second problem is if the stop loss is at $18 and the stock is at $20 and the company comes out with bad news after the close, it can open in the morning at $16 and you never got out. The stock gapped down and went right past your stop loss. The second problem is that your price is not guaranteed.
And third, NYSE Specialists have the books on those with stop losses. It is said that they can take the stock down, clear our a bunch of stop loss prices and then close the stock up for the day. Stock manipulation is the third problem with stop losses.
These problems are why Decker Retirement recommends their computer, trend-following models used for risk clients.
Contact Brian at Decker Retirement Planning to help you with retirement questions and planning for your retirement future.
You can find more topics on the changing economy, market uncertainty, and ways to help plan for A Safer Retirement™ at ABC4.com/RetireNow.