Baby Boomers – What is a Good Stop Loss Percent to use?

I had an email the other day from Paul one of my subscribers. He asked, “What was a good Stop Lost Percentage to use? He went on to ask if I could provide more information that might help him.

I thought I would answer his question using a post to my blog. However I need to point out that I am not a financial advisor. The information here is based on what I would do personally. You will need to make your own decisions or consult your trusted financial advisor before proceeding.

One concern I do have though is if you have never used stop losses before try using them with small position sizes first using money you might have that is not in your nest egg. Also there are times like now where the market is so volatile it might be best to sit on the side lines.

The first place I suggest you go and look is at Mutual Fund Magic by Al Thomas. Al has an excellent web site where he imparts his wisdom based on many years trading and investing. He has a very no-nonsense style and is the scourge of many would-be investment gurus because he is highly critical of what they and the wealth management industry say are the best practices of investing.

Al has written a book called, “If it doesn’t go up, don’t buy it”. With a title like that you can imagine he is not well liked by the wealth management community.

In his introduction he lists Wall Streets Ten Commandments that he guarantees will send you broke. They include Buy and Hold, Dollar Cost Averaging and Diversify. Get his book and read it before you even think of trading/investing your nest egg.

The first section is an instruction manual on mutual fund investing that should keep your nest egg safe if you follow his advice. He recommends a couple of newsletters he uses to rate mutual funds before he buys them. He also uses them to exit non-performing mutual funds. He also suggest a combination of 200 day moving averages from two different sources. Knowing when to “hold ’em and when to fold ’em” is the key.

The next section is on stocks. He insists you use Stop Losses and place them when you place your order. That way they are in place and you can forget about them. He recommend a stop loss of about 10% but also he scales into a position too.

Mutual Funds by their nature cannot have stop loss orders applied to them. Their price is determined by the closing prices of all the underlying stocks at the end of the day. So you should consider ETF’s which are really tradable index mutual funds and these can have stop losses applied at order time.

My own view is if you invest in ETF’s they tend to be less volatile than stocks and you may well find a 10% stop loss keeps you in the ETF most of the time. But if you are investing in individual stocks you really need to do some back-testing and check their volatility because a 10% stop loss may only get you whipped out. In such a case it may be better to look for a less volatile stock. A reason for sticking to a 10% stop loss is to protect your nest egg so you can keep going after a loss.

Some other references worth a look are:

Profit from Prices – STOP-LOSS: HOW TO USE IT IN TRADING

Amateur Investor – Using Stop Loss Orders to prevent an Investing Disaster

InvestmentU – The Two Most Profitable Secrets of the World’s Greatest Investors

So to answer the question I am really saying you need a strategy and an objective especially if you will be using your nest egg. A stop loss is only part of that. A 10% stop loss could be used as a rule-of-thumb when investing and it should keep you in the stock or EFT most of the time. But make sure you know what you are doing or use a professional to do this for you. The first rule is to protect your nest egg in retirement by avoiding large losses. Then look for profits.

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