When buying a stock (or ETF) you’d leave an instruction with your platform to automatically sell the stock if it declines by a percentage you choose (it’s commonly set at ~10%).
The logic being that should it fall further you’d be out of the stock, preventing your loss getting worse. Your max loss is 10%.
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The Reality: Larger Declines are Rare …
The chart shows average stockmarket declines in a year – taken from 75 years of data. Markets gain most years but declines during it are very normal.
A typical year sees an average of 7.3 declines of 3%. While a 10% decline occurs, on average, once a year …
75 years of data for the US market – and it’s very similar for global markets.
So the evidence shows that a mild decline rarely becomes a larger one. More often that not, a 5-10% stop-loss will make you sell at the wrong time.
How Stop Losses Destroy Wealth …
Imagine you place a trade with a stop-loss of 10%. Firstly, the sell trigger is unlikely to be activated.
More dangerously: IF the trigger is activated, further declines are improbable – making you sell at the worst possible time.
Thereafter: markets tend to rebound quickly to regain new highs. We recently observed that following the Trump tariff tantrum.
Your Risk?
Holding cash and sitting out the subsequent rebound.
That’s the real wealth destroyer.
Evidence shows we have emotional resistance and disbelief in the market after having just sold. Making it difficult to re-enter.
The Challenges of Timing the Market
Investing is not about getting out at the right time; it’s about participating. Time IN the Market beats TIMING the market.
Even pro investors struggle with this. The chances of predicting the exact moments to exit and re-enter are slim, making stop-loss strategies ineffective.
Consistently timing the market is nearly impossible and not a reliable strategy for maintaining and growing wealth.
Pound Cost Averaging: A Smarter Alternative
Instead, consider pound cost averaging (PCA). This involves gradually investing over time, allowing you to average out the purchase price of stocks.
Our investors systematically use PCA to acquire quality stocks and ETFs when they’re on sale, at very attractive prices.
Even Better: Use Options to PCA and earn income.
Incorporating Options into PCA can be a game-changer.
Options allow investors to set a preferred buying price (Strike Price) while earning a monthly income. This creates returns even if the market doesn’t hit your desired strike price.
That means you either buy stocks at favourable prices OR earn monthly income generated through options.
A Recent Case Study …
Recently, one of our investors did exactly that – with an option on a US ETF (XLI) during the April tariff tantrum.
His options earned 1.3% in monthly income alone. He got to purchase the shares at his lower Strike Price, resulting in a $1,588 total return – or 12.3% – over two months.
That’s a much better alternative to stop-loss orders.
In Summary
A stop-loss may sound good but it often keeps you uninvested in cash, missing out on the inevitable market recovery. That’s the real wealth destroyer.
Instead, strategies like pound cost averaging and Options can have more predictable and favourable outcomes.
Have a lovely weekend (another hot one).
Ps
NOBODY will care about your money like YOU will …
The Investment Academy has transformed how thousands of people now invest. Creating more diversified passive portfolios for Growth and Recurring Income.
Always Remember:
Time in the Markets always beats timing the markets
Stay Diversified
Minimise those leakages: Fees, Inflation, and Taxes
Financial Markets are a great source of recurring income
ETFs, Balanced Funds and Options achieve all the above
Being educated helps you outperform 99% of the population
… to ensure your investments work for YOUR financial freedom (not someone else’s)
And …
For more guidance, our Investment Academy will help you implement all of this in a step-by-step way.
Thousands of people have learnt how to diversify and pound-cost-average into low-cost, set-and-forget ETFs & Funds for inflation-beating growth. And Options to create recurring income.
– Don’t take the above as advice as it may not apply to you personally
– Your Capital is at Risk
– You may not be covered by the FSCS
– Anything mentioned in a podcast or in a previous article was valid at that time and may not continue to be now
Stockmarket Investment Academy … Step-by-Step Training to Diversify your Wealth and Create Passive Compounding in the Markets (click image below for details …)
About Me
Manish Kataria is a Fund Manager. A CFA-qualified professional with 18 years’ experience in investment management and UK property. He has managed investment portfolios for JPMorgan and other blue chip investment houses. Asset classes managed include Equities, ETFs, Bonds, Funds and Options. Within property, he invests in and owns a range of assets including developments, HMOs, BTLs and serviced accommodation. InvestLikeAPro was set up so anyone can invest like a pro.
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