Do you have a personal stop loss?

[Closet_Gamer]

This is not against what you posted... just and observation....

I have read this before... but this does not make a bunch of sense to me.... if I need the money in 3 years does that mean I have to sell right now

What if the stock had taken a 10% hit for some reason... but I thought it would recover.... however, if I 'need' the money in 3 years I am not supposed to hold the stock but convert it to cash NOW and then hold the cash for 3 years!!!

I think it's more to say that if you don't need the cash, there is no need to sell when the market is down and therefore no need for a stop loss (or to attempt to time the mkt). The market nearly always corrects within 3 years so you can ride it out.

So, yes, if you know you have a cash expenditure in the next 3 years do not expose that $$$ to market volatility.

 

[Blue Collar Guy]

I really hated seeing my 401K drop like a stone around 2000, and decided then to not let that happen again. It paid off as I pulled my money back as the 2007/8 pullback occurred, but I was slow to get back in and lost out on some gain in 2009.

For me, if I see the market pull back over 5% I plan to move everything into my 401K's safe fund, and hunker down. It would be too painful to see my 401k drop below 7 figures.

Anyone else have a similar mindset?

I think its a wonderful idea. I look forward to your future posts so i can track what im sure is a winning strategy. Just to provide the other side of the coin i will continue with my buy and hold. When the market dropped 15 % from July to September 2011 how did you make out then? Or is this a new 2007/8 fear strategy that emerged since then?

 

[Texas Proud]

I think it's more to say that if you don't need the cash, there is no need to sell when the market is down and therefore no need for a stop loss (or to attempt to time the mkt). The market nearly always corrects within 3 years so you can ride it out.

So, yes, if you know you have a cash expenditure in the next 3 years do not expose that $$$ to market volatility.

I understand what they are saying... but that just moves the decision point by 3 years... it still does nothing about selling when the market is up or down...

Option A... sell when you need the money.... what can happen... two examples...

You could have left the money in the market and it has gone up 20% and you made out and are happy you did so... the good...

You could have left the money in the market and it dropped 20% and you are pissed that you have to sell more shares to get your money.... the bad...


Option B.... sell 3 years earlier because you do not hold equities if you need the money in 3 years....

You sell the shares and hold cash for 3 years... the market goes up 20% and you lose on that market gain... oh well

You sell the shares and hold cash for 3 years... the market tanks by 20% and you say 'wow, it was smart that I sold'.... the good...


As you can see... each option has a good and bad outcome... the good and bad outcomes are the opposite of the other... so in a sense the only thing you are doing is betting on what the market is going to do for the next 3 years... in a sense timing the market...

For me, history has shown that the market goes up more than it goes down.... I will take Option A most of the time.... I have been rewarded for taking this option most of the time.... and am probably ahead doing so....


I think having a good AA mutes a lot of this... when the market goes down I will keep reducing my cash balance for living expenses and hope it goes back up before I need to fill it back up.... as always YMMV....

 

[kaneohe]

......................

For me, if I see the market pull back over 5% I plan to move everything into my 401K's safe fund, and hunker down. It would be too painful to see my 401k drop below 7 figures.
..........................

Hopefully you have a lot of real-world experience with your technique and have field tested it in the real world and know it works. One of the great blessings of my life is that I learned very early (when I did not have any money) that I was not very good at stock or market timing. In fact , I was terrible at it. That has prevented me from trying to crystal-ball the markets. I would hate to
learn the lessons I learned long ago now with real retirement money.

 

[DrRoy]

John Bogle:

"The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently."

Charles Ellis:

"Short-term market timing is a loser's game. None of us know what tomorrow holds."

+1. I have no market timing plan of any kind, but do have an AA that I can live with. To get timing right, one has to know when to sell, and when to re-buy. If you were right 50% of the time for each (probably generous), then the statistics are that you would only get both right 25% of the time. Better to ride it out.

 

[jazz4cash]

My AA takes care of any stop loss.

BTW if you thought your 401K dropped like a stone in 2000, ask those of us who had 401Ks on October 19, 1987.

In 87 I had only been in the market for about 10 yrs. To get daily 401k updates you had to call the 800 #. You could only make changes once per month (or some such). I bet the lines were jammed on 10/19/87.

 

[MRG]

In 87 I had only been in the market for about 10 yrs. To get daily 401k updates you had to call the 800 #. You could only make changes once per month (or some such). I bet the lines were jammed on 10/19/87.

I was in IT at a Megacorp that was the system of record for many accounts across multiple funds.

I worked in a small group that supported Megacorp's online systems. To say unusual events occurred is a huge understatement(how do you explain we ran out of "virtual resources"?)

Somehow the executive's figured out where we lived and visited. It was probably a good event for me professionally, not so much for those who made sudden buying and selling decisions.

 

[Fedup]

In 87 I had only been in the market for about 10 yrs. To get daily 401k updates you had to call the 800 #. You could only make changes once per month (or some such). I bet the lines were jammed on 10/19/87.

The line to the Brokerage was jammed. I know because I had a put on the market Friday, when it dropped a Monday, by Tuesday it recovered. I made some money but not as much as I had hoped.

 

[Texas Proud]

The line to the Brokerage was jammed. I know because I had a put on the market Friday, when it dropped a Monday, by Tuesday it recovered. I made some money but not as much as I had hoped.

From what I remember reading not all of the 'jammed' lines were actually jammed... some brokers just stopped answering...


I remember being at work and a friend calling and telling me the blow by blow as he was home watching TV.... IIRC it was the last half hour that really tanked....

 

[donheff]

If you plan to go to cash after a 5% drop and get back in whenever you are one of the rare ER dot org members who should buy an annuity. We are up pretty high right now do it quickly. Look for an SPIA with a modest inflation clause.

 

[Ready-4-ER-at-14]

I try to limit each holding to a small % of the total. That way if any one thing takes a hit I can ride it down to 0 without adversely affecting the total. I have been tricked into selling perfectly good companies whose price was suddenly decreasing for no apparent reason, only to see them mostly come back. When I back tested what the stock market did I found most stock do blah and some are real winners. What a shame to have say sold Microsoft or amazon early on when a blip happened..

I invest in many stock sectors (energy, housing, oil, etc. ). Often hot money jumps from one sector to another. I notice one group of stock in one sector decreasing almost exactly what another group of stock in a different sector is increasing.

Also I invest in different asset classes. Some things do not move lock step with stock. Bonds, annuities, real estate(REITs), cash, or commodities for example.

Finally I invest in different countries to limit strong or weak dollar apparent changes in overall portfolio.

If you only have say 1/5th of holdings in stock and all your stock went down half, you could still theoretically have 90% of your total nest egg.

I don't market time much unless it is play money amounts but I will sell losers in taxable accounts at year end for a loss and then reinvest that money either after the necessary time has elapsed (31 days still?) or in a different holding.

Anyhow this has worked for me in past but no one knows what the future will be. Don't know if I am lucky or good, but either works.

To keep me humble I always remember Pompeii in ancient Rome that was wiped out by the eruption of mount Vesuvius in 79AD. Even the richest and smartest merchants and money lenders there didn't avoid that final market downturn. (not mad just like the little flame to depict the volcano..)

 

[brokrken]

Never. Buy and hold for me. Didn't even do a trade last year. Will do maybe 4 this year. My view is the less you trade the better you are likely to do.

+++++1 for this

 

[Ready-4-ER-at-14]

I was rereading this thread and saw the mention of not havinging to sell during three year window regarding selling of stock if there is a market down turn.

A guy wrote a book entitled buckets of money. His idea was regarding your money you had short term, intermediate term, and long term money. He was a little vague at least to me at times but short term was like 0-7 years, midterm 8-15, and longterm 15+.

He quoted some statistics from ibson sp? that if you held diversified stock portfolio like a large index (sp500) for 15 years you always came out ahead historically.

Short term money was cash, cds, short term bond/cd ladders

midterm was bonds, and REITs. Maybe other stuff.
There was serious controversy regarding non public reits eventually.

From what I found by personal investigation is lots of money can be made in them but you can always lose and never sure when cash comes back out. Seems the private REITS build or acquire real estate and eventually sell to public REITS.

I chose to use public REITS, but they have their own risks as well.

The nugget I got from this man was the longer you can be in stock without having to sell, the more likely you hit a sweet bull market and can sell some of bucket long term, to replenish short term and intermediate term buckets. (added to be thorough, he had you living out of the short term buckets so little market risk short term re usual expenses)

 

[OldShooter]

... A guy wrote a book entitled buckets of money. His idea was regarding your money you had short term, intermediate term, and long term money. He was a little vague at least to me at times but short term was like 0-7 years, midterm 8-15, and longterm 15+. ...

+1 on the buckets concept. The formulaic asset allocation methods, like fixed-income % = age make no sense to me because they do not take into consideration the person's total assets, the person's secure income from other sources, or anything else about individual circumstances.

Buckets are easy. I just think in terms of two buckets, but three works too. Bucket #1 is 3-5 years worth of needs. This is the conservative aka fixed income bucket. My bucket #2 is everything else, with an AA designed to smooth the ride a bit and to reflect the purpose of the money in bucket #2. "Purpose" might be to fund my retirement. It might also be to fund my retirement but also to create a sizeable estate for descendants or for charity or for both. An aggressive bucket #2 might be 100% equities, in which case bucket #1 probably needs to be a 5 year bucket to minimize the risk of having to sell equities into a down market. ... and so on. The bucket concept is, to me, the best paradigm for retirement planning and AA.

 

[Starsky]

Been thinking about this subject a lot lately. Some good comments here.

One thought for older ER members is that in trying to preserve wealth rather than create it, the stop loss is a great comfort. I understand that stop losses are suboptimal from an investment perspective, but that assumes that you have enough time to recoup your losses on the market rebound. Aggressive growth is not always the goal, especially in retirement. I have come to prefer locking in my excess profits for the year around July/August and starting over in the new year. I find if I stay greedy throughout the year, things tend to start to fall apart, especially after such a long bull run in the market. Hot sectors don't stay hot forever. I often wonder how my results would change if I only played the market for the first half of the year every year.

To get back to where you were after five years is tough when you're older, since there's no guarantee I'll even be around to enjoy the bounce. My approach is to place looser (12-15%) stops in the first six months of the year when growth is more likely and tighten them up to 5-6% in the latter half of the year when profits are more elusive. It seems like the biggest financial crises in history all tend to occur in September/October. I don't mind missing out on a little profit to protect my upside and anything I sell can always be repurchased later.

Edit: It's probably worth mentioning that most of my investments are in funds and ETFs, not individual stocks, so my volatility is pretty minimal.

 

[CyclingInvestor]

Never. I have kept 95+% in individual stocks since 1993. Retired since 2006. Big market drops are just opportunities to trade a stock that only dropped a bit for those that really got unfairly pummeled (by my evaluation). Always only very high quality stocks (IMO).

 

[gcgang]

I have more of a stop gain, and liquidate enough after a run up to fund my annual spending cash.

+1

I've stopped a lot of gains over the last few years, not reinvesting and selling stock around the edges, but I'm still making new highs.

What was it Baron Rothchild said, "I'll tell you my secret. I never buy at the bottom, and I always sell too soon."?

 

[Fermion]

Never. I have kept 95+% in individual stocks since 1993. Retired since 2006. Big market drops are just opportunities to trade a stock that only dropped a bit for those that really got unfairly pummeled (by my evaluation). Always only very high quality stocks (IMO).

Big name stocks that have been around for ages. Bear Stearns, Kodak, Sears, those type.

 

[Ted_Shepherd]

Never. Buy and hold for me. Didn't even do a trade last year. Will do maybe 4 this year. My view is the less you trade the better you are likely to do.

My policy is just like yours. Someone can see what that has meant for my wealth simply by looking at the performance of the S&P500 since I was 40, 1980. The volatility does not prompt me to buy or sell. It's LTBH for me, though I don't do any buying now that my paychecks have stopped coming in. That was in 1993. (Retirement is wonderful except for deaths among people I loved and some health problems of my own in aging.) My "exit strategy" is to hold the retirement stash as if in trust for the next generation. They will come into possession of it when I die. (Started to say something cute like "when I reach room temperature.") Meanwhile, I manage it to preserve its purchasing power after the annual hits of my living expenses and income taxes, though I can't do this perfectly, given market volatility. IRS requires me to take money out of my IRA each year and pay income taxes on that distribution. That means that I have to do a little selling in my IRA each year. That imposes a requirement that I come up with a selling strategy within the IRA, replenishing its cash, though I know very well that I do not know how to time the market. IRS does not require me to spend that withdrawal (after tax). Sometimes I spend it; sometimes I reinvest it. IRS doesn't care.

 

[Which Roger]

I'm as Boglehead as they come, but in 2008-2009, I told myself that I'd capitulate and get out of stocks if the market dropped 70% from its high. But I'm not sure I really would have pulled that trigger, and fortunately it never got to that point.

There is a lot of evidence that the market has momentum - if it's up today, it's more likely than not to go up tomorrow, and vice versa. So, absent trading costs, selling everything after a down day, and getting back in after the next up day is a rational strategy. But in the real world, trading costs more than offset that advantage.

 

[Danmar]

My policy is just like yours. Someone can see what that has meant for my wealth simply by looking at the performance of the S&P500 since I was 40, 1980. The volatility does not prompt me to buy or sell. It's LTBH for me, though I don't do any buying now that my paychecks have stopped coming in. That was in 1993. (Retirement is wonderful except for deaths among people I loved and some health problems of my own in aging.) My "exit strategy" is to hold the retirement stash as if in trust for the next generation. They will come into possession of it when I die. (Started to say something cute like "when I reach room temperature.") Meanwhile, I manage it to preserve its purchasing power after the annual hits of my living expenses and income taxes, though I can't do this perfectly, given market volatility. IRS requires me to take money out of my IRA each year and pay income taxes on that distribution. That means that I have to do a little selling in my IRA each year. That imposes a requirement that I come up with a selling strategy within the IRA, replenishing its cash, though I know very well that I do not know how to time the market. IRS does not require me to spend that withdrawal (after tax). Sometimes I spend it; sometimes I reinvest it. IRS doesn't care.

This post mostly reflects my view. I guess not surprising as you started off by agreeing with me,. My portfolios are all taxable though, so it's much simpler. I also view my portfolio as "in trust" for my heir, although I am thinking now that maybe just holding it at this level, inflation adjusted, might be a good strategy. Otherwise, we are probably underspending. Very good problem to have.

 

[Chuckanut]

Here's my plan:

If stocks fall, I will sell them.
I won't buy them again until they go up.

What could possibly go wrong?

 

[flintnational]

No. We have stuck with our asset allocation through the 1987, 2000 and 2008 downturns. At the bottom of the 08 downturn, our NW was down 7 figures. If I were still working and contributing to a 401K, I would hope for a significant down turn (AKA a buying opportunity). If I could not stomach a potential downturn, as others have stated, I would adjust my allocation to a point that I would not be tempted to sell.

 

[Blueskies123]

Starsky, what if there is a 40% flash crash and your stop loss is not filled at your 12-15% but at the 40%? Then by the end of day the market has fully recovered?

 

[CyclingInvestor]

Big name stocks that have been around for ages. Bear Stearns, Kodak, Sears, those type.

I do not invest in "sicker than a dog" stocks just because they have been around a long time, only those that meet my standards. Financially sound, strategic decisions that I agree with, focused on their areas of expertise - like JNJ, PG, WMT, XOM, etc.