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Our Stop-Loss Strategy

I seek to protect your portfolio by employing stop orders on the stocks and ETFs I buy.  A stop order is an instruction in the system that will trigger a sell order on a position when it falls below a given value.  There will be times when the price movement in a stock results in our stop price being triggered, which subsequently triggers a sell in that stock, just to see that stock reverse direction and start back up again.  When that happens, I may buy that stock again.  That can feel like wasted effort and it sometimes means we are buying back in at a higher price than what we sold for, but I would rather give up some upside potential than ride the market down, since when the market is declining, we don’t know where the bottom will be.  Major market downturns typically follow exuberant headlines in the financial press.  We were getting some of those mid-2021.  That combined with the market’s sensitivity to interest rates is leading me to be cautious.  You can hold on forever as the market falls in the hope that recovery is around the corner.  My strategy is designed to capture most of the upside and to avoid the occasional disastrous downside.   
If you had been invested in the S&P 500 in September 2000 and never added to or withdrew any money from your account, you would have been in the red until July 2007.  That would have lasted until October when you would have been underwater again until April 2013.  That is the kind of ride I seek to avoid.  Some argue that the market has always come back and done well, so you should just stay invested through it all.  There are a few problems with that investment philosophy.    
The first is that it is fine to say the smart thing is to buy and hold now that all those losses have been made up, but when you have lost a substantial amount of money and the market keeps moving in the wrong direction, you can’t see where the bottom of the market is going to be.  It is difficult for an individual investor to ride that out in the hopes that a lifetime’s worth of saving and investing will not be wiped out.    
The second problem is that, as John Maynard Keynes said, “in the long run we are all dead”.  His point was that the market can remain irrational a lot longer than you can remain solvent.  If you need money when you have lost a significant portion of your nest egg, pulling cash out of your account makes it harder to recover because you will have to sell more shares in order to come up with your needed cash.   The above example covers a span of about 13 years.  That is a long time to wait just to get back to where you started from, and individual investors, understandably, have a hard time buying and holding through that long of a period 
The third problem is that if you ride the market all the way down, you have a steeper hill to climb to get back out, whereas if you cut your losses when you see signs the market is deteriorating, you can jump back in when you see it begin to recover.  It is true that you miss the beginning of the upturn that way, but you also missed much of the downhill slide.  So, when you get back in you don’t have as far to go to be made whole again.    
There is risk in any investment strategy and I, obviously, can’t guarantee we will win all the time.  In a choppy market, my strategy can mean more buying and selling and a lower return as I sell after a downturn and wait for an upturn to get back in.  What we can do is try to smooth out the ride and try to keep you solvent when the market turns crazy.   In a choppy market, we may underperform, but in a truly ugly market (1987, 2000, 2008) we expect to outperform.  In 2020, we had substantially lower losses as the pandemic hit than the overall market, and we recovered quicker.  That is the goal.  We are not trying to "beat the market".  We are using the market to provide an acceptable return at an acceptable risk.   

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