Regular readers of this blog will know that I (personally) don’t like using stop-loss orders. The reason for this is that all the back-testing that I’ve ever done strongly suggests that long-term performance is degraded when using such orders. Also, I (again, personally) find it very annoying/frustrating when prices bounce immediately following the stop-loss order getting hit – something that seems to happen all too often – although it may well be that this has a bigger psychological impact on my memory than the positive impact of the times when prices continue lower – which hasn’t been too often over the years since the Great Recession (2008). However, as we get older and into our retirement years, our focus tends to change from the Fear of Missing Out (FOMO) to the fear of facing large losses from which we may not have the time to recover before we need to withdraw money from our accounts. Consequently, especially when travelling, or when I know that I will not be checking portfolios frequently, and when I cannot find an attractive hedge using Options, I will place stop-loss orders for disaster protection.
Before I left on a recent vacation I placed numerous Trailing Stop-Loss Orders (TSLOs) on positions in the Rutherford, Hawking and Dirac Portfolios (but not in the Kahneman-Tversky Portfolio). With the recent fast pullback a number of these TSLOs were hit – including VTI holdings in the Rutherford Portfolio, but leaving me with positions in VTI in the Kahneman-Tversky portfolio where I did not have the protective orders in place.
In the Hawking Portfolio, TSLOs on IVV, XLK, INF, UTG, JRO, JRI and MGU were all hit in the last 2 days. In the Dirac Portfolio I was stopped out of CPRT, SNPS, MSCI, SPGI, AMD and TFX over the past week.
So, is this good or bad? At the moment I have no idea – which is why I am writing this blog today so that we can follow the markets going forward with no obvious bias – although, psychologically, I am a little ticked off at the large number of sales at a time when, as a short-term trader, I would be considering buying the pullbacks on the contrarian view that the rapid pullback may be overdone and we may see a recovery/bounce. For me, as a former short-term trader, this is a difficult situation but, as an investor, I need to stick to a system designed for the longer term.
We are only a few days away from the End-Of-Month reviews of all portfolios so we will see where we stand at that time.
Should we place stop orders on our positions or should we be prepared to wait for our next review date to check rankings/recommendations? I don’t know whether we will get a definitive answer to this question from these “real-life” examples – but we’ll see what happens. As a “reference” I (personally) could accept a 20% draw-down (although, obviously, I would prefer to avoid it) but this may be too high for some investors to feel comfortable.