stop loss
Written by David, May 26th, 2011
No matter how much of an expert you’ve become in a particular field, it’s always a good idea to step back and review the basics. When it comes to investing with exchange-traded funds (ETFs), there are several basic “rules” I like to periodically visit.
As you likely know, I’ve been touting ETFs as excellent investment growth vehicles, but anything that is new to you can be a little tricky. So, here’s a brief review of some of the basics to keep in mind when investing in ETFs.
Rule One: Diversification
ETFs are flexible investments — you can buy options, go short, and hedge. ETFs also let you invest in a variety of sectors and trends without the risk of single-stock exposure. In fact, some international ETFs give you exposure to stocks or entire sectors that can’t be bought in U.S markets. Let’s face it, ETFs offer diversity — if your goal is to have a mix of assets, ETFs let you do this simply and cheaply.
Rule Two: Explore Your Options
Remember, just because ETFs have stock-like properties doesn’t mean that you are confined to investing in equities. ETFs let you bet on almost anything that can be tracked by an index. Since the economic downturn, it has become wise to look into alternatives to stocks, namely bonds and currencies. Through ETFs, you can focus on corporate bond indices and/or inflation-protected Treasuries. You can buy ETFs that short the British pound sterling, are bullish on the Japanese yen, etc. There are even ETFs out there that let you buy a basket of currencies ranging from the Indian rupee to the Swedish kroner.
Another alternative to stocks could be to keep part of your portfolio in cash. Instead of using money market funds, you could invest in short-term bond ETFs, which often pay double or triple what money market funds yield.
Rule Three: Keep an Eye on Trends, and Moving Averages
I like to isolate trends in the market by observing both the 50- and 200-day moving averages to know when to buy and to sell. The moving averages remove the “noise” in stock prices. When a stock breaks above or below its 50-day average, the short-term trend has been broken. When the ETF falls below its 200-day average, it is time to sell.
Rule Four: Set Reasonable Stop Losses
This rule is more technical than strategic. To lock in your profits and limit losses, you must set reasonable stop prices or trailing stop losses, depending on the pick. If you have a trailing stop loss in place, you will be protected if the price of your ETF soars and then suddenly dives.
Rule Five: Watch for Minimum Trading Volume
Another important thing to remember while trading ETFs is to watch for trading volume. You want to invest only in ETFs that have a daily trading volume of at least 100,000 shares. Remember, the higher the volume, the more liquid the ETF. A fund with low trading volume could leave you vulnerable to wider swings in the share price during volatile times.
Of course, there certainly is more to know about ETFs, but you now have some basic rules to follow. It never hurts to remember the fundamentals of ETF investing, whether you are an experienced investor or just trying to get started. In a volatile market, knowledge and caution gain heightened value.
Written by David, January 26th, 2011
Over the past several weeks we’ve taken you through Parts I, II and III of our four-part series on getting your 2011 financial house in order. Let’s recap these first three sections before we hit the fourth and final segment.
Part I was all about conducting an inventory of your assets and all of your accounts—taxable accounts, retirement accounts, insurance and annuities, etc. Part II was about reviewing where, precisely, those assets are invested, including knowing specifically which stocks, bonds, exchange-traded funds (ETFs), mutual funds, variable annuities, etc. you currently own.
Part III in our series was all about reallocating your assets from underperforming investment vehicles into those you think will give you the best chance of success going forward. Now, this is no easy task, so to help you decide just which areas of the market might perform best this year, we conducted a teleseminar where we dug deep into the details of many of these investment themes. In that one-hour call, we gave listeners some picks as to which investment vehicles I thought represented the best ways to profit in the year ahead. If you’d like to hear an audio replay of this event, all you have to do is register today.
Part IV, the final installment in our series, is what we call: Implementing Success
This step is all about monitoring and safeguarding your money. You see, once you have placed your bets in the stocks, funds, etc. you think give you the best chance to succeed, you need to make sure you don’t walk away from the table. When it comes to investing, you have to be an active participant all the time. Not that you have to watch every tick of the virtual tape each day, we are not advocating that. But what you do have to do is be vigilant, and keep good track of what’s taking place in the markets and with your particular holdings.
There are always risks present in markets, and this is something you must be keenly aware of when your capital is at risk. By monitoring the health of the overall market, and by keeping watch on the technical trends in all of your positions, you can mitigate a lot of that risk.
So, the essence of Part IV of our personal financial inventory series is to be vigilant, to make sure you have stop losses in place, and to know what’s happening with the market and your money at all times.
Written by David, December 10th, 2008
I thought that this week we should review some of the basic “rules” behind investing in exchange-traded funds (ETFs). I have been touting ETFs as excellent investment growth vehicles, but anything that is new to you can be a little tricky.
Rule One: Diversification
ETFs are flexible investments — you can buy options, go short, and hedge. ETFs also let you invest in a variety of sectors and trends without the risk of single-stock exposure. In fact, some international ETFs give you exposure to stocks or entire sectors that can’t be bought in U.S markets. Let’s face it, ETFs offer diversity — if your goal is to have a mix of assets, ETFs let you do this simply and cheaply.
Rule Two: Explore Your Options
Remember, just because ETFs have stock-like properties doesn’t mean that you are confined to investing in equities. ETFs let you bet on almost anything that can be tracked by an index.
Since the economic downturn, it has become wise to look into alternatives to stocks, namely bonds and currencies. Through ETFs, you can focus on corporate bond indices and/or inflation-protected Treasuries. You can buy ETFs that short the British pound sterling, are bullish on the Japanese yen, etc. There are even ETFs out there that let you buy a basket of currencies ranging from the Indian rupee to the Swedish kroner.
Another alternative to stocks could be to keep part of your portfolio in cash. Instead of using money market funds, you could invest it in short-term bond ETFs, which often pay double or triple what money market funds yield.
Rule Three: Keep an Eye on Trends, and Moving Averages
I like to isolate trends in the market by observing both the 50- and 200-day moving averages to know when to buy and sell. The moving averages remove the “noise” in stock prices. When a stock breaks above or below its 50-day average, the short-term trend has been broken. When the ETF falls below its 200-day average, it is time to sell.
Rule Four: Set Reasonable Stop Losses
This rule is more technical than strategic. To lock in your profits and limit losses, you must set reasonable stop prices or trailing stop losses, depending on the pick. If you have a trailing stop loss in place, you will be protected if the price of your ETF soars and then suddenly dives.
Rule Five: Watch for Minimum Trading Volume
Another important thing to remember while trading ETFs is to watch for trading volume. You want to invest only in ETFs that have a daily trading volume of at least 100,000 shares. Remember, the higher the volume, the more liquid the ETF. A fund with low trading volume could leave you vulnerable to wider swings in the share price during volatile times.
Well, there certainly is more to know about ETFs, but you now have some basic rules to follow. It never hurts to remember the fundamentals of ETF investing, whether you are an experienced investor or just trying to get started. In a volatile market, knowledge and caution gain heightened value.
Written by David, December 09th, 2008
The New Year is almost here, and soon we’ll all be making our list of New Year’s resolutions. I got a head start on mine for 2009, and here’s just a sneak peak at what I want smart investors to resolve to do next year:
- I will prepare my family for a tough economic environment in 2009.
- I will have a positive increase in my liquid net worth in 2009.
- I will save in excess of 10% of my gross income in my retirement accounts.
- I will save and safely secure at least three months of living expenses.
- I will stop losing money on bad investments or bad investment advice.
Of all of these resolutions, perhaps the most important is the last one. You see, losing money on bad investments is perhaps the most frustrating thing that can ever happen to you.
To accomplish this goal, you need to adopt a new mindset. You need to adopt new investing techniques, and you need to get rid of and get out of bad investments as the market returns to rally mode.
Although there are many ways to make sure you don’t lose money, one great technique is to set trailing stop losses on all of your invested positions.
Although the mechanism for setting a trailing stop loss varies depending on which brokerage you use to place your trades, the principle of a stop loss is the same everywhere and it shouldn’t be thought of as complicated.
When you set a trailing stop loss on a new position, you are telling your brokerage firm to sell that position as soon as it falls whatever percentage you set from the buy cycle high. Let me explain.
If you purchase a stock or an ETF for a hypothetical $10 per share and you have placed a 10% trailing stop loss order on that purchase, the stock or ETF will be sold if it falls to $9 per share. If, however, the stock or ETF rises after your purchase to $20 a share, then comes back down to $18 per share, your position will be sold at $18 per share.
A trailing stop loss allows you to protect yourself from a quick dive in the share price of your security, and it allows you to protect your gains in the event that the security soars and then pulls back sharply.
If you are unsure of how to set a stop loss, then please consult the Web site of your online brokerage, or call your brokerage and ask its representative to provide you instructions on how to do so. Most online brokerage firms make it easy to set trailing stop losses, and you can do so whenever you purchase an ETF or common shares of stock.
Please take the time to learn how to set stop losses. In this fast-and-furious market, having a trailing stop loss in place is absolutely essential to making sound trading decisions.
Written by David, November 14th, 2008
You and probably every other investor in the world right now are concerned about avoiding big losses in the equity markets. It certainly is understandable, in light of the big pullbacks in markets virtually across the globe.
But did you know that there is an easy way to limit your downside in equity investments? I have applied this technique successfully many times this year with exchange-traded funds (ETFs).
The safeguard that I use is to set stop losses.
This can be done as easily with individual stocks as with equity ETFs. Sure, everybody wants to profit, but you need to be prepared for when your investments go south. If you invest, this is going to happen to you. Hey, it’s part of the game, but losses don’t have to keep you out of the game. If you plan accordingly, you can cut your losses and/or protect gains by setting stop losses.
Now, because ETFs tend to be less volatile than individual equities, you may not feel the need to set a stop loss. This, in my view, is a big mistake. No matter how great your risk tolerance may be, you should always set a stop loss on every ETF you buy. Your stop loss could be 15% below your original buy price or 10% if you are more conservative. You also could be really conservative and set a stop loss below 10%. Just remember that wherever you set your stop loss, don’t be mad if and when your ETF gets sold out from underneath you.
This is not a disaster for your portfolio, but rather disaster avoidance. Think of it this way. You may have saved yourself from a frightening freefall of the sort we’ve seen in many ETFs throughout much of this bear market.
I have been stopped out of positions in the past, then re-entered later and ultimately made money.
For newcomers to setting stop losses, here’s a brief explanation. A stop-loss order can be placed with your broker or an online brokerage to limit your potential losses in an ETF. You can set the stop loss at the same time that you place your purchase order or you can do so whenever you or your financial advisor feel the timing is right.
A big advantage of a stop loss is that you do not need to monitor your position on a daily basis. You can go on a vacation, enjoy the holiday season or be away from the news for any reason of your choosing, yet still protect yourself from deep losses.
One additional factor to consider is that once the stop price is reached, a stop-loss order becomes a market order. Just because you set a stop loss at $25 does not mean that a buyer is offering that price. In a fast-moving market, the next highest bidder for your shares in an ETF might offer a price of $24.75 or even less, for example. Once your stop order becomes a market order, you receive the best price for that holding currently available. However, do not let this uncertainty deter you from setting stop losses.
