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Investing Without Trailing Stops: Here’s Why 75% of Stocks Are a Sucker’s Bet
by Alexander Green, Advisory Panelist
Saturday, September 19, 2009: Issue #1097
A couple weeks ago, I explained why it is imperative to run trailing stops behind your individual stocks.
Sell stops ensure that your capital is protected and your profits don’t slip through your fingers.
However, one subscriber took me to task, saying that a trailing stop guarantees you won’t “sell at the top.”
Quite true.
However, “selling at the top” and its corollary, “buying at the bottom,” are not realistic investment goals. Here’s why…
The Danger of Selling High and Buying Low
For one thing, you never know the top or the bottom until you’re looking in the rear view mirror. And given enough time, all-time highs and lows are usually exceeded.
For example, you may sell a stock at its 52-week high – not a good idea since you should always let your winners run – and find that it goes on to double or triple from there. Likewise, if you buy at the all-time low, the stock may head still lower (after all, that’s the direction it’s heading).
Our trailing stop policy works, in part, because it accepts the uncertainty that is an inevitable part of equity investing. Sure, you may get lucky and buy at the bottom or sell at the top from time to time. But hoping to “get lucky” isn’t much of an investment strategy.
And there’s yet another iron-clad reason to use trailing stops…
How Trailing Stops Can Maximize Your Gains & Mitigate Your Losses
It’s a little-known but depressing fact that the vast majority of individual stocks post negative returns over the long run.
This may come as a shock to those who’ve been told that equities are the very best long-term investment.
- But research by the investment management firm, Dimensional Fund Advisors, found that form 1980 to 2008, the top-performing 25% of stocks was responsible for 100% of the gains in the broad market.
- The bottom 75% of stocks collectively generated annual losses of 2% over the past 29 years.
It’s pretty sobering to realize you were three times as likely to own losing stocks as winners.
However, this data makes the fundamental assumption that you actually held all these stocks over the entire period.
Many stocks make spectacular runs before crashing and burning. By using a trailing stop, you could have participated in an awful lot of upside without sticking around for the Battle of Little Big Horn.
Likewise, even if you picked a stock that went south immediately, a trailing stop would have kept your losses small and acceptable.
Don’t Argue With the Market… Use Trailing Stops Instead
The bottom line is this: Anyone can plunk for a few shares. Getting out at the right time is the true art of investing.
The key is to make sure you’re cutting your losses and letting your profits run.
Emotions like fear and greed (and hope) can prevent that. But trailing stops enforce a discipline that takes the emotion – and the second-guessing – out of the investment process.
Understand that market prices reflect facts about a company better than opinions. So don’t argue with the market.
When you buy a stock, enter a trailing stop below it to protect your principal. And as the stock rises, keep raising the stop to protect your profits.
This is the best way for you to minimize your losses and maximize your gains – even if some of the stocks you own are on their way to Waterloo.
Good investing,
Alex Green
Editor’s Note: Adhering to a disciplined trailing stop policy is just one of the wealth-building strategies that has made The Oxford Club most of the most successful publishers of investment advice in the U.S. – and around the world. In fact, over the past five years, the independent Hulbert Financial Digest has ranked The Oxford Club in the top five global investment newsletters out of the 200 that the publication tracks. For more information on how to scoop up the many profitable benefits that come with being a member – just go here.
The Investment U News Tracker:
~ A Bold Auto Projection From Michigan:
A “disaster.” That was how Fiat-Chrysler CEO, Sergio Marchionne, sums up car sales in September.
But that hasn’t stopped Congressman Gary Peters (D-MI) predicting that firms like Fiat-Chrysler and GM will return to profitability within the next one to twoyears, assuming their restructuring plans are successful and auto sales hit their normal annual average range of 10-13 million units.
That’s some forecast, with nationwide unemployment at a 26-year high. Moreover, he seemingly bases his projection on what was a short-term, government-induced spike – the much-ballyhooed “cash for clunkers” program. Quoted in Yahoo!, Peters hails it as “very successful” and has provided “great economic stimulus.”
After all, who knows the auto market better – the CEO of a major car manufacturer, or a politician?
~ Another Bailout On the Horizon?
Three years ago, the Federal Housing Administration insured about four million American mortgages (insurance against defaults, that is). Today, it covers 5.3 million, according to the Associated Press.
Ordinarily, that increased business would be a good thing. But these aren’t ordinary times. And with the Mortgage Bankers Association saying that 17% of FHA customers are either behind with their payments or already in foreclosure, the FHA has a cash crunch on its hands. The agency said on Friday that its cash reserves have edged under its mandated level for the first time. That could put the squeeze on the increasing number of homebuyers, who turn to the organization for financial help.
And you know what that means? A potential hat-in-hand trip to Washington, begging for a taxpayer bailout. FHA commissioner, David Stevens, says the agency “will not require taxpayer assistance,” but for an already skeptical public, it may well be a case of, “We’ll believe it when we see it.”
- Trailing Stops Made Simple…
- Trailing Stops: Lock In Your Profits with This Not-So-Secret Sell Strategy
- Trailing Stop Discipline: How to Know When to Sell Your Stocks
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13 Responses to “Investing Without Trailing Stops: Here’s Why 75% of Stocks Are a Sucker’s Bet”
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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September 19th, 2009 at 10:29 am
What is the best amount to set for a trailing stop?
By dollar or by percent and by how much?
I have been setting at 5% and selling half my holding each time.
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September 19th, 2009 at 12:25 pm
I like the email newsletter re-design. The other format was completely lame and I could barely tell where the article content was compared to the ads and promos.
Bravo!
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September 19th, 2009 at 2:28 pm
I agree with your trailing stop loss and adhere to it. I learned a painful lesson last year when I entered a stop loss on five positions on my computer, and got wiped out on all five positions, which eventually went back up. I keep my trailing stops seperate now. Vic Higgins
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September 20th, 2009 at 4:10 am
I triesd to sign up with the company that wouls send email reminders re trailing stops etc., but was unsuccessful. In addition there was no provision to get the Oxford Club discount. Would you please reprint the data re that company so I can try again.
Sincerely,
Salvatore Campagna
34829362
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September 20th, 2009 at 4:02 pm
WHY MUST A TRAILING STOP BE ADJUSTED?
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September 20th, 2009 at 6:12 pm
yes but then again and i’ve done this quite a bit. when one does put a trailing stop loss..stocks have been know to hit their bottom below your stop loss and then spike right back up again. needless to say at that point your out of the game..till it hits a lower bottom again if it does. charles in fl
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September 20th, 2009 at 6:28 pm
With the volitility of the market I use the past 5 day range for setting my trailing stop. On occasion I have lost out due to an unusual dip with a rebound but since June I have more than doubled my porfolio. Also my portfolio is very fluid. If I have a stock that is showing a flat trend it is gone and I move on to another stock.
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September 20th, 2009 at 7:48 pm
I have tried a lot to buy low and sell high. It is frustrating and nerve wrecking does not happen. I am going to follow your advice from now on. Once you had told about the site who moniro the portfolio and automatically tell you about the stops. Can you please tell me about what site is that. Thanks.
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September 21st, 2009 at 11:01 am
Your article doesn’t say how far below the price paid the trailer stop should be.
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September 29th, 2009 at 11:44 am
Absolutely IMPORTANT methodology! I have been using the Trailing Stops since a few months ago, and it dramatically made sure the profit for me and stops my loss.
Now I understand if anybody want to win in the stock market especially for a long run, this is the rule that has to be followed every time, every stock.
But I have my own % stop limit for different strategic stocks, it depends as what kind of stock, which price enter point, how much profit already have, did double or not, how much risk you can take and how much profit you want to keep…good investing.
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October 14th, 2009 at 8:13 am
Hi Alex,
Does the trailing stop also applies to options? or is it only for stocks…
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admin Reply:
October 16th, 2009 at 2:02 pm
Dear Kumanan,
As with any investment, there are two potential outcomes: You can make money or you can lose money. Because of that, the answer to your question is a definite “yes.” Before or just after entering the trade, determine exactly how much you’re willing to see it drop if things go south. And if it reaches that amount, then let it go.
Investment U Research Team
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October 17th, 2009 at 8:51 pm
Dimensional Fund Advisors simply copied research that had already been done by Blackstar Funds.
http://www.mebanefaber.com/2008/12/02/the-capitalism-distribution-fat-tails-in-action/
“research by the investment management firm, Dimensional Fund Advisors, found that form 1980 to 2008, the top-performing 25% of stocks was responsible for 100% of the gains in the broad market”
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